Standing Committee A

[Sir John Butterfillin the Chair]
(Except clauses 13 to 15, 26, 61, 91 and 106, schedule 14, and new clauses relating to the effect of provisions of the Bill on section 18 of the Inheritance Tax Act 1984)

Schedule 20

Inheritance tax: rules for trusts etc

Amendment moved [this day]: No. 287, in page 111, line 13 [Vol II], leave out
‘settled property (including property settled before 22nd March 2006)'
and insert
‘property settled on or after 22nd March 2006'.—[Mrs. Villiers.]

John Butterfill: I remind the Committee that with this we are discussing the following:
Amendment No. 280, in page 111, line 30 [Vol II], leave out from beginning to end of line 7 on page 112 and insert—
‘(a) that the bereaved minor, if he has not done so before attaining the age of 18, will on attaining that age become absolutely entitled to the settled property or to the income arising from it,
(b) that the bereaved minor, if he has not done so before attaining the age of 25, will on attaining that age become absolutely entitled to—
(i) the settled property, and
(ii) any income that has arisen from the property held on the trusts for his benefit and been accumulated before he became beneficially entitled to the property in accordance with paragraph (a) above,
(c) that, for so long as the bereaved minor is living and under the age of 25, if any of the settled property is applied for the benefit of a beneficiary, it is applied for the benefit of the bereaved minor, and
(d) that, for so long as the bereaved minor is living and under the age of 18, either—
(i) the bereaved minor is entitled to all of the income (if there is any) arising from any of the settled property, or
(ii) no such income may be applied for the benefit of any other person.'.
Amendment No. 272, in page 111, line 31 [Vol II], leave out ‘18' and insert ‘25'.
Government amendments Nos. 355 and 356.
Amendment No. 281, in page 112, line 41 [Vol II], leave out
‘on attaining the age of 18 or becoming, under that age, absolutely entitled as mentioned in'
and insert
‘becoming entitled as mentioned in paragraph (a) or (b) of'.
Amendment No. 273, in page 112, line 41 [Vol II], leave out ‘18' and insert ‘25'.
Amendment No. 282, in page 112, line 44 [Vol II], leave out ‘that age' and insert
‘the age at which he would have become absolutely entitled as mentioned in paragraph (a) or (b) of section 71A(3) above'.
Amendment No. 288, in page 113, line 12 [Vol II], leave out from ‘subsection,' to end of line 23 and insert
‘there were substituted for the reference to 13th March 1975 in subsection 8(b) a reference to 22nd March 2006.'.
Government amendment No. 357.
Amendment No. 274, in page 113, line 26 [Vol II], leave out ‘18' and insert ‘25'.
Government amendments Nos. 358 and 384.
Amendment No. 290, in page 113 [Vol II], leave out lines 42 to 44.
Amendment No. 291, in page 114 [Vol II], leave out lines 9 to 23.
Amendment No. 275, in page 114 [Vol II], leave out lines 10 to 14 and insert—
‘For section 71(1) of IHTA 1984 substitute—
“(1) Subject to subsections (1A) to (2) below, this section applies to settled property if—
(a) one or more persons (in this section referred to as “beneficiaries”) will, on or before attaining a specified age not exceeding twenty-five, become absolutely entitled to it, and
(b) until a beneficiary becomes entitled to the settled property or the income arising from it, the settled property and the income from the settled property is to be accumulated so far as not applied for the maintenance, education or benefit of a beneficiary.”.'.
Amendment No. 284, in page 114 [Vol II], leave out lines 10 to 14 and insert
‘For section 71(1) of IHTA 1984 substitute—
“(1) Subject to subsections (1A) to (2) below, this section applies to settled property if—
(a) one or more persons (in this section referred to as beneficiaries) will, on or before attaining a specified age not exceeding eighteen, become absolutely entitled to it or to any income arising from it,
(b) where a beneficiary becomes entitled pursuant to paragraph (a) above to the income arising from the settled property rather than to the property itself, that beneficiary subsequently becomes absolutely entitled to the property concerned on or before attaining a specified age not exceeding twenty-five, and
(c) until a beneficiary becomes entitled to the settled property or the income arising from it pursuant to paragraph (a) above, the settled property and the income from the settled property is to be accumulated so far as not applied for the maintenance, education or benefit of a beneficiary.”.'.
Amendment No. 276, in page 114, line 14 [Vol II], at end insert—
‘(1A) Section 71(4) shall be replaced with the following provision with effect from 6th April 2008—
“(4) Tax shall not be charged under this section—
(a) on a beneficiary's becoming absolutely entitled to, or to the income arising from, settled property on or before attaining the specified age,
(b) on the death of a beneficiary before attaining the specified age.”.'.
Amendment No. 285, in page 114, line 14 [Vol II], at end insert—
‘(1A) Section 71(4) shall be replaced with the following provision with effect from 6th April 2008—
“(4) Tax shall not be charged under this section—
(a) on a beneficiary's becoming absolutely entitled to, or to the income arising from, settled property on or before attaining the age specified for the purposesof paragraph (a) of subsection (1) above or, if later, on the beneficiary becoming absolutely entitled to the settled property on or before the age specified for the purposes of paragraph (b) of subsection (1) above, or
(b) on the death of a beneficiary under the age at which he would have become absolutely entitled to the settled property pursuant to paragraph (a) or (b) of subsection (1) above.”.'.
Amendment No. 286, in page 114, line 14 [Vol II], at end insert—
‘(1B) In section 71(6) IHTA 1984 leave out ‘and' after ‘paragraphs (a)' and insert ‘and (c)' after ‘(b)'.'.
Amendment No. 292, in page 114, line 38 [Vol II], after ‘section', insert ‘71 or'.
Amendment No. 293, in page 115, line 22 [Vol II], after ‘section', insert ‘71 or'.
Amendment No. 294, in page 115, line 27 [Vol II], after ‘section', insert ‘71 or'.
Amendment No. 297, in page 116, line 35 [Vol II], after ‘section', insert ‘71 or'.
Amendment No. 277, in page 119, line 11 [Vol II], after ‘which', insert ‘section 71(1)(a) or'.
Government amendment No. 365.
Amendment No. 278, in page 119, line 18 [Vol II], after ‘which', insert ‘section 71(1)(a) or'.
Government amendments Nos. 366 and 367.
Amendment No. 279, in page 120, line 42 [Vol II], after ‘end', insert ‘section 71(1)(a) or'.
Government amendments Nos. 369, 371 and 372.

Theresa Villiers: Thank you, Sir John. I welcome you back to the Chair.
Picking up where I left off, we were discussing the problems that will result from the proposal inschedule 20 to move the vesting age from 25 to 18. The reality is that a sudden windfall at 18 is far more likely to be squandered to fund irresponsible behaviour than money that is transferred at 25. Research by the Financial Services Authority, for example, shows that 18-year-olds are much less financially capable than 25-year-olds. In its report, “Levels of Financial Capability in the UK”, the FSA concluded that 18-year-olds have a factor score of just 27 out of 100, while those aged 20 to 29 have a higher factor score of 40.
Frankly, I received too many representations on this point to hope to be able to cover them all, so I shall select just a few. Ian Buckley of Rathbones solicitors, which has many years of experience with wills and trusts, wrote:
“The Accumulation and Maintenance Trust was the creation of a previous Labour administration and has been used in good faith pursuant to legislation distinguishing them from discretionary trusts. To unravel these in order to avoid a punitive extra charge will have a negative effect on savings and furthermore assets in the hands of 18 year olds are more likely to be spent than saved...It is our view that 18, an age when many young people can be particularly vulnerable is not a suitable age for an individual to receive material wealth absolutely. 25 is widely regarded as a more acceptable age.”
Colin Jelley of Skandia Life was even more outspoken. He stated:
“Forcing beneficiaries to get outright entitlement at 18 simply fuels the conspicuous expenditure of teenage alpha males.”
A solicitor practising in the Paymaster General’s home city, Bristol, contacted her local MP, my hon. Friend the Member for Woodspring (Dr. Fox), to protest about the shift in the vesting age from 25 to 18. She did not want to be named directly but wanted her views made known. She wrote:
“My clients are responsible and caring adults; they are infuriated by the State’s attempt to manoeuvre them with the threat of unfair tax penalties into making decisions which they believe to be fundamentally wrong and against the best interests of those they hold dear.”
She goes on to outline the following case:
“The client is a widower. He lost his wife 8 years ago. He has3 children aged 16, 13 and 11. His sister lives with the family and helps care for the children. His estate comprises a house worth about £350,000 plus savings of about £200,000. He has recently been diagnosed with a brain tumour and is not expected to live for more than a few months. He knows and accepts that his estate is above the IHT threshold. If he dies this year, as is likely, his estate will face a bill of £106,000. He wants to leave what is left of his estate after tax in trust for his children. He wants the fund retained until the eldest child is 25. This way, he hopes that there will be enough to provide all 3 children with a roof over their head at least until the youngest child is 20. If he tries to avoid the penalty Inheritance Tax of the Budget and chooses 18 instead, child 2 will be 15 and child 3 only 13 when the house will have to be sold to provide child 1 with the one third share to which he will then be absolutely entitled. If the client chooses the more prudent course, the capital (not just the income gains) of the trust will be eroded with the periodic inheritance charges and exit charges. This man is not one of the super-rich but the Budget for him and his family produces an atrocious result. He is not alone.”
Another case was reported in The Times on 1 April 2006:
“Girl A, who cannot be named, lost her father in the Hungerford massacre in 1987. Her mother later died of an atrophying illness. Her parents’ assets were put into trust to be held until she was 25. The trust was supposed to pay out its assets to Girl A in 2011 with no tax liability. After Gordon Brown’s Budget attack on trustafarians, the funds could be hit with a tax charge of up to 6 per cent. David Rule, head of trusts at Moore and Blatch, the solicitors in Lymington...that run the trust, says that the trustees could override the deeds and pay out early. He says, ‘We are being bullied into the tax charge. If it’s right for the trust to pay out at 25, it’s wrong for the trustees to pay out at 18 instead to avoid the tax.’”
That is the background to the problem that we face this afternoon. In a spirit of compromise, I tabled different sets of amendments to try to find at least one option that might find favour with the Government.
Amendments Nos. 272 to 279 would amend the regime for bereaved minor trusts, restoring the vesting age to 25 instead of 18, and for all the reasons that I have just set out I would urge the Government seriously to consider them.
As an alternative, I have tabled amendmentsNos. 280 to 286 as a compromise that would mitigate the damage done by schedule 20. They would disapply the new, penal, IHT charges in cases in which income vests at 18 and capital at 25.

Helen Goodman: I do not wish to make light of the problems of those families to which the hon. Lady refers. Her earlier argument was that 18-year-olds are not competent to manage such money, yet many young people of 18—more now than in 1997—go to university, and it is precisely then that they need a lot of money. Has she considered that?

Theresa Villiers: It is true that children going to university need financial support, because they have tuition fees to pay, but accumulation and maintenance trusts have the facility to cover such needs. Income can be paid out while the student is at university and chunks of capital can also be paid out if necessary, to provide accommodation for example. The trusts that I am proposing be retained would meet the needs of such situations, because one could tailor the amount that was given to the needs of the student—it would not have to be huge.
As the argument has moved on, I shall probably not be pressing the compromise amendments that would have vested capital at 25 and income at 18.
Government amendment No. 358 sets out proposed new provisions relating to trusts in which property does not vest until the age of 25. This morning the Paymaster General indicated that the Government position represented no change. However, I believe that the new provisions demonstrate a welcome shift of position since the original draft of schedule 20 and since the debates on Second Reading and in Committee of the whole House, when no Minister seemed inclined to accept that there was any problem regarding trusts for those aged 18 to 25. The fact that some relief is now envisaged for such trusts represents a welcome change. 
The way in which the amendments work is currently defying some of the best legal brains in London, so I will let the Paymaster General explain her own amendments. The thrust of the changes seems to be to allow parents to provide that the vesting of income and capital be postponed to the age of 25, without the20 per cent. up-front entry charge being incurred. However, the trust property will be subject to the periodic charge during the seven-year period when the beneficiary is aged between 18 and 25. That would amount to approximately 4.2 per cent. of the property in the trust at the time.
The shift is obviously welcome but it still levies an extra charge, albeit a reduced one. There is also an important question which I hope that the Minister will be able to address for the Committee. The supporting documentation issued by the Treasury in relation to the amendments indicates that the option could be used by all existing A and M trusts, rather than just in the future. However, proposed new section 71D(1) provides that it only applies where one of the beneficiary’s parents is dead.
With that limitation, the relief will have limited impact on the thousands of responsible parents and grandparents who have set up such trusts to provide for children. It would mean that the harsh consequences of retrospective legislation would still apply to many A and M trusts. It seems that the later provisions in the Government’s amendments can be interpreted to disapply the restriction and to extend the relief provided for in section 71D to all existing A and M trusts, even when both parents are still alive, but I would welcome clarification from the Paymaster General on the extent of the relief provided by the Government’s amendments. Even if she is able to give that assurance, her amendments seem to presume that setting up trusts that do not vest until the age of 25 is some sort of privilege that has to attract a tax penalty, albeit a smaller one than originally proposed. That is why I am still minded to press both my amendment that would retain the current A and M structure and keep the vesting age at 25, and my amendment to ensure that existing A and M trusts are not affected by the schedule 20 changes.
That brings me to the group of amendments that would remove the retrospective impact of the Government’s proposals on existing A and M trusts. It is not the Opposition’s view that there should be an absolute bar on retrospective legislation. No doubt the Paymaster General will be able to cite instances of such legislation that has been adopted by previous Conservative Governments. However, we believe strongly that retrospective legislation should not be adopted unless there is a good reason and a clear justification for doing so. We believe that there is no such clear justification in this case.
The use of retrospective provisions in this case jeopardises confidence in the tax system and deters people from saving and taking responsible steps to provide for their future and that of their children. The Society of Trust and Estate Practitioners points out the similarity with the pensions system as an area where long-term stability is needed to encourage people to make long-term provision for their future and that of their families. It states:
“Individuals enter into long-term arrangements in expectation of a particular tax treatment. The professionals believe that the government should not bring forward legislation which bears upon the decisions of families who have no opportunity to unravel arrangements that they would never have entered into if they had known the change was coming.”
I received too many representations on this matter to recount them all. However, I think accountant Richard Meynell summed up the feelings of many when he wrote in forthright terms to a national newspaper:
“Regardless of the merits or demerits of the proposed tax, the fact that it is to be retrospective is unfair, unethical and an intolerable betrayal of trust. If one cannot trust the law extant at the time of making the decision, what can one trust?”
This legislation is genuinely retrospective. When the matter was discussed in Committee of the whole House, the Paymaster General argued that it was not because wills and trusts can be varied. As I shall describe in relation to the discussion of immediate post-death interest, where this matter is even more crucial, variation of wills and trusts can often be problematic. Even if one gets over such practical problems, to which I shall come in due course, it is still no answer in this case because settlors simply do not have the options open to them that they did when the trust was initially set up. At that point, they could have decided not to set up any trust, they could have set up a trust that contained less property or they could have taken the tax hit and set up a fully discretionary trust.
The clock cannot be wound back to enable settlors to make a decision on whether to set up the trust all over again, as illustrated by the case study provided by David Rule at Moore and Blatch, which I outlined before. Trustees face the invidious choice of taking the tax hit or seeking to change the trust so that income vests at 18, knowing that the settlor did not believe that this was in the best interests of the beneficiary. I welcome the limited but important relief provided by the Government’s amendments in this area. However, in the light of the very serious concerns that have been expressed on the retrospective nature of the legislation, I am keen to press the matter to a Division, specifically in relation to retrospectivity.
Finally, we come to Government amendmentNo. 384, which extends the scope of persons who can set up bereaved minor trusts from parents to include step-parents. That extension widens the scope of the bereaved minor trust and from that point of view it is welcome. I shall return to that issue in relation to amendments Nos. 270 and 271, which seek an even broader expansion of the ability to set up a trust for a bereaved minor. In my view, there is no sense in limiting such trusts to settlors who are parents. They should be open to all relatives, and I have tabled amendments to that effect.
I close my remarks by welcoming the modest change of position as helpful to existing A and M trusts, while maintaining that the Opposition still have significant concerns about the vesting age, even assuming that the Government’s changes are incorporated in the Bill.

Celia Barlow: I should like to speak to amendment No. 358. The Government’s decision provides a good answer to the concerns that several professions and official bodies raised on behalf of families during the Bill’s consultation period. The Government have rightly argued that people gain their legal maturity at 18. People aged 18 are old enough to drive, to sign contracts on their own and, happily, to vote. It was therefore unreasonable to go on protecting people’s personal choices to make their money available to children only when they are 25, and to grant them certain exemptions in inheritance tax. The Government are forcing no one to pass on their money when their children are 18. All sorts of provisions in wills are still possible; they just do not enjoy tax exemptions. On the other hand, I recognise the arguments that have been put forward. Inheriting a certain sum of money when one turns 18 can be a dangerous temptation, especially if one is not prepared for it. It might be reasonable advice to gain some experience in managing one’s own finances before the assets are finally bequeathed.
The Government have found a good compromise. The new tax charge of 4.2 per cent. is not punitive; it makes it clear that all the choices that the individual makes can be tax free. The Government have taken into account the legitimate interests of bequeathers and the necessity to close tax loopholes. I therefore support the provisions.

Philip Dunne: I am pleased to serve under your chairmanship this afternoon, Sir John. I shall start by declaring an interest: I am a settlor of an accumulation and maintenance trust for my children.
In addressing this group of amendments, I start by requesting that the Paymaster General answer the questions that I put to her in this morning’s sitting in relation to the request from the Treasury Committee for detailed information on the evidence of the abuse that the clauses seek to address. She chose not to respond to my challenge, and I hope that she will do so when she makes her winding-up speech on these amendments. I particularly hope that she will do so, because having re-read the contributions made in the Committee of the whole House, I think that the Government’s intent is clear. The statement was made: 
“We believe that trusts have an important role to play in helping people to manage their affairs—of course they do—but we also believe that a person's choice whether to use a trust structure should not be tax driven.”
It continued, stating that
“it is unfair that some people exploit the trust rules in order to avoid inheritance tax.”—[Official Report, 2 May 2006; Vol. 445, c. 866.]
Those were not my words, but those of the Paymaster General. The Government clearly believe that exploitation is taking place for tax avoidance purposes, but they have provided no evidence whatever to establish the scale of the problem or, indeed, whether the problem exists.
We heard the hon. Member for Hove (Ms Barlow) talking about age discrimination, and the argument has been made that there is a discriminatory impact, but those on the Government Front Bench have not advanced that argument with any coherence. The professionals, whom my hon. Friend the shadow Chief Secretary to the Treasury has cited on more than one occasion, deny that any significant avoidance is going on through those trusts, and they are united in that view. I shall quote from the Society of Estate and Trust Practitioners in relation to accumulation and maintenance trusts. It says:
“We do not think that the Government has made the intellectual case or evidenced any form of inappropriate tax avoidance that justifies such a material unlevelling of the playing field as between the ability to make gifts outright free of IHT under the potentially exempt transfer regime compared with gifts into trust.
Going forward, the ability to use trusts will therefore remain a poor second in fiscal terms to outright gifts which means that many of the socially desirable uses of trusts continue to be penalised.”
That statement was issued in a press release following the publication of the Government’s amendments, in full recognition of the moves that the Government have made in an attempt to climb down from the untenable position that they adopted at the time of the Budget and in the debate on the Floor of the House.
There is no abuse going on through accumulation and maintenance trusts; if there is abuse, the Government need to demonstrate it to us. Such trusts are used, as my hon. Friend has clearly mentioned, to enable settlors to provide some protection for capital value assets for those who are not in a position to manage those at a young age. This is not a discriminatory device; it is a protective device to enable individuals to reach a level of financial sophistication and maturity before they have access to their capital. That is perfectly reasonable. I urge the Government to withdraw these proposals completely, not in part. I support my hon. Friend’s amendments.

Julia Goldsworthy: I welcome you, Sir John, to the Chair.
I have three fairly straightforward questions for the Paymaster General. First, if the Government are insisting on applying the new regime, on what basis did they choose to apply it to existing trusts as well as new ones from the date of the Budget? I should be interested to hear what impact they judge it will have and how many people will be affected. Secondly, on trusts for bereaved minors, can the Paymaster General confirm that the proposed changes will restore the pre-Budget situation to people who are eligible on the basis of their age and if their parent is deceased? Unlike the hon. Member for Hove, I found Government amendment No. 358 tortuously complicated to understand.
Finally, will the Paymaster General explain the situation for those currently over 18, who were due to benefit at 25 before the new proposals were put in place? Under the proposals being enacted, will those people become immediately liable for the new tax treatment unless they withdraw?

David Gauke: Earlier today, the Paymaster General said that she was taken by surprise by the reaction to many of the elements of the Budget proposals, including those on IHT and trusts and the publication of the Finance Bill. However, it is not just the Government who were taken by surprise. The proposals took the whole profession by surprise, including the accountants and lawyers who deal with this matter. There had been no indication that something of this sort was on the way. Indeed, Government policy had been to avoid creating artificial obstacles to using trusts where they would bring significant non-tax benefits.
I am grateful that the Government have made some movement in this area and introduced amendments, but one has to question them. This matter has been going on for some months. Why have the Government only now brought out their amendments? There were only available on Friday, which does not give the Committee a great deal of time to evaluate their contents. As we have heard from my hon. Friend the shadow Chief Secretary and the hon. Member for Falmouth and Camborne (Julia Goldsworthy), many of these provisions are complex. I suppose that I should declare an interest, of which everyone in the room is aware, because I am married to a tax lawyer.
On a number of occasions in these proceedings, the Government have noted comments made by the professionals and tabled amendments, which is sensible. That is the nature of this proposal and the process. We are considering perhaps the most controversial part of the Bill, but the Government have, it seems, substantially changed their original position. The period in which professionals can analyse the new sections—we have heard particular mention of Government amendment No. 358—is absolute minute; we are talking about a couple of days. That seems to be a failure in the system. There will not be adequate scrutiny of the Government’s amendments if we work within such a time frame. Although it is pleasing to have these amendments, it is regrettable that they came out so late. We are debating them on a Tuesday, but they became available only on the previous Friday.
On whether it is right for 18-year-olds to receive the bequest, or whether there should be some sort of tax penalty or charge if it is delayed until the child is 25, the starting point ought to be that parents are in the best position to decide on the appropriate time. Common sense might say that 25 is better than 18, but people may take a different view; we hear the argument, “People can vote and have all sorts of rights at the age of 18, so why delay until 25?” We can have an argument about that, but who is best placed to decide—the Government, or the parent making the bequest?

Helen Goodman: Does the hon. Gentleman not think that there is something rather ridiculous about the position that is being taken up? It is possible to be a Member of Parliament at 21, and someone under 25 could sit with us on the Finance Bill Committee, deciding what the rules are, but Conservative Members say that individuals are not sufficiently responsible to take charge of their own money until they are 25.

David Gauke: No, I do not think that it is a ridiculous position, because we are talking about a person deciding how they wish to bequeath their own assets to their children; they will clearly have the best interests of their offspring at heart, and they will take a view on what is the best age—18 or 25. I do not see that that has to be determined by the Government, or that the Government should say, “No, no, this is terribly paternalistic, and the age must be 18.”

Mark Francois: As far as I know, there are 649 Members of this House. Just out of interest, does my hon. Friend know how many of them are under 25?

David Gauke: I suspect that the answer is none, but perhaps I had better check with the hon. Member for Falmouth and Camborne.

Julia Goldsworthy: It is my understanding that the youngest Member of Parliament, my hon. Friend the Member for East Dunbartonshire (Jo Swinson), was elected at the age of 25.

David Gauke: I am grateful for that. My argument—[Interruption.]

John Butterfill: Order.

David Gauke: Thank you, Sir John, for stopping us before we drift off on to matters that are probably best not recorded by Hansard.

Rob Marris: I caution the hon. Gentleman from the opposite end of the age spectrum: some mothers with a 51-year-old son who is an MP think that he is not grown up.

David Gauke: I have absolutely no doubt that the hon. Member for Wolverhampton, South-West (Rob Marris) is correct in that assessment. He makes a fair point, and I suspect that the mother is perfectly right to hold that opinion. None the less, I question the certainty with which the Government express the view that the age should be 18, and not 25, and that it is terribly paternalistic to say otherwise. A tax-neutral judgment should be made by the parent, but we have moved away from that. That is the key element. We have come back from where we were, but it has been established that the decision on whether the age should be 18 or 25 is no longer tax-neutral, and that is regrettable; that is a freedom that parents should have when determining the arrangements that they wish for. We can all look at our own experiences—and those older than me may be able to look at their children’s experiences—and see that individuals vary, and the age at which one is appropriately mature may vary from person to person. The flexibility should be there, but the provision is no longer tax neutral.

Philip Dunne: Does my hon. Friend agree that if the principal plank in the Government’s argument against the trusts continuing until age 25 is so significant, the subject should have come up during the two-and-a-half-year debate with the industry on the future of modernising trusts? As far as I am aware, it was not raised.

David Gauke: My hon. Friend makes an excellent point and takes me back to where I began these few comments. The industry was taken by surprise. No one was expecting this provision to come along. There should have been a long-lasting debate about it. It is regrettable that it is now crammed into the Finance Bill and that the Government’s position has changed a couple of days before we debate the issue.
However, the fundamental point is the one made by my hon. Friend the Member for Ludlow (Mr. Dunne). What is the harm done by the existing arrangements? How is there an abuse? What is the cost of the abuse? The Government have not been able to establish that there is an abuse and if they cannot establish that, I do not see why we should change the law in this area.

Jeremy Wright: I also welcome you, Sir John, to the Chair. I want to make a brief contribution and endorse many of the things that have been said by my hon. Friends, particularly the point made by my hon. Friend the Member for Ludlow, which has just been referred to. Despite the encouragement of the Select Committee, it seems that the evidence in favour of the change has not been presented to us. The Committee are entitled to see it before we judge whether or not it is a sensible change in the law.

Dawn Primarolo: What is the hon. Gentleman referring to? The Select Committee did not ask for examples of abuse. It asked for how we settled on the numbers that we thought would be affected by the changes. Is he referring to another recommendation or to something different?

Jeremy Wright: I would settle for that information, but I do not believe that we have seen that either. The Government have the obligation to provide the justification for the changes that they wish to make. To date, the Committee has not been presented with that justification. The Government have the opportunity to do that in this Committee sitting. I hope that they take advantage of it.
When the point was put to the Paymaster General that 18-year-olds might not, in some cases, be suitably mature to deal with the substantial amounts of money that might be involved, she said, “Well, I prefer to trust 18-year-olds in this country.” She did not think that we were giving 18-year-olds enough credit. It is clear from that statement that the people she does not trust are the parents and the grandparents who set up the trusts in the first place. They must surely know their children and grandchildren better than the Government do. The whole problem with the measure is that, yet again, it indulges the Government’s view that they know best. The truth is that parents and grandparents often know best and that is why the trusts ought to be available up to the age of 25.

Stephen Hesford: The hon. Gentleman has just let the cat out of the bag. Those on the Conservative Front Bench argue that the change will affect those who are on a middle income—those who are not very well off. What he has just said is that the issue may involve considerable sums of money. That is what it is about. It is about people settling considerable sums of money to those at 18.

Jeremy Wright: It may involve considerable sums of money. The question that I am raising is whether 18-year-olds are, in every case, sufficiently mature to deal with the money that they are given or left. The bigger the amount of money and the more irresponsible the 18-year-old, the bigger the problem. That is common sense. That is the point that I am making. The problem is that, as I would have thought every Member of the Committee would accept—
John Hemming (Birmingham, Yardley) (LD) rose—
The Economic Secretary to the Treasury (Ed Balls)rose—

Jeremy Wright: If I may finish the sentence, I will certainly give way to the hon. Gentleman and then to the Economic Secretary. The problem is, as I would have thought every Member of the Committee would understand from their own personal experience, that all 18-year-olds do not mature at the same rate. Therefore, some will be well and truly ready for the responsibility that will be passed on to them. Some 16-year-olds will be ready for it and as the hon. Member for Wolverhampton, South-West suggested, some 51-year-olds will not. However, the point is surely that the greatest discretion must be given to those who know the individual best.

John Hemming: Given that property values are now so relatively high and that about 70 per cent. of the population own their own property, does the hon. Gentleman agree that the amount to appear in the trust would be a considerable sum for an average family?

Jeremy Wright: I certainly agree with the hon. Gentleman. In many cases, the sums that we are considering will be a lot of money for an 18-year-old. That is the difficulty that we are addressing specifically.

Edward Balls: I hesitate to inform the Committee and Mrs. Gauke about house prices in Hertfordshire, but I shall come back to that later.
I am interested in the issues to which the hon. Member for Rugby and Kenilworth referred because I have ministerial responsibility for matters that pertain to them. If we take the logic of his argument about a child trust fund to a sensible conclusion, it becomes clear that access to funds should be open only to individuals when they have reached the degree of maturity needed to make sensible financial decisions. Is he proposing that we should change the limit from18 to 25-years-old? It is interesting that he suggested an increase in the inheritance tax threshold this morning. Does he wish to create some further policy for the Conservatives?

Jeremy Wright: I think that the Economic Secretary fully understands what I am saying, but let me explain it again. We are talking about money that belongs to the parent or the grandparent. It is for them to decide what they wish to do with it. The Government are arguing that the law should be changed and that we should alter the age from 25 to 18 years in all but certain circumstances. I wonder, first, whether they have the evidence to back up that change and, secondly, whether they have really thought the matter through. It cannot be right for all 18-year-olds to be considered similar in this regard, and it must be right that parents and grandparents know their children and grandchildren better.

Helen Goodman: Will the hon. Gentleman give way?

Jeremy Wright: No, I will not give way to the hon. Lady because I am about to come to a point that she made earlier.

Edward Balls: Perhaps I made the mistake of taking the arguments made by the hon. Gentleman too seriously. Given what he said about the maturity of 18-year-olds to make financial decisions for themselves, surely I should be as worried about the maturity of individuals to make decisions about the use of child trust fund money when they reach the age of maturity. Surely, he should consistently say that all people are not really fit to make those decisions until the age of 25. That is a perfectly sensible position for him to hold. I disagree with it, but if he wants to be consistent, he should say that to the Committee rather than hedging around.

Jeremy Wright: We are discussing not the child trust fund, but a change in the law that the Government wish to make. The task for the Committee is to test whether that change is the right thing to do.
The hon. Member for Bishop Auckland (Helen Goodman) drew an analogy by referring to the age at which people can become Members of the House. They can do that at 21. The problem with her analogy is that, in order for people to get here at the age of 21, the electorate would have to make a judgment on whether they are fit to hold that responsibility. It does not come automatically. Every 21-year-old is not entitled to become a Member of the House. There is a test whether the 21-year-old in question in sufficiently mature to hold the job. The same test applies here. The Government have not made their case.

Helen Goodman: It would be nice if the electorate were in a position to judge the financial competence of all hon. Members, but they are not. Furthermore, the hon. Gentleman is inconsistent in other respects. We are sending young 18-year-old men to Iraq to fight for this country. At the same time as we are giving them that responsibility, which is a far more serious responsibility than that of looking after a little packet of money, Opposition Members are saying that, because they are really concerned about maintaining the loophole, they want to keep the age at 25.

Jeremy Wright: I should be delighted to discuss the hon. Lady’s analogies all afternoon, but I do not think that I should do so. I am making a straightforward argument that she well understands. Her analogy was flawed because intervening in the process is the judgment of those who know the individual well. That is what should happen in the circumstances that we are discussing; that is what has been happening. The Government argue that the age should change. They have not made their case on that. The trusts are made for good reasons by people who know the individuals concerned very well.

Helen Goodman: Will the hon. Gentleman give way?

Jeremy Wright: No, I will not. The Government have not made a convincing argument about why the change should be made. Until we have heard such an argument, the Committee should reject the proposal.

George Young: I am sorry that my stature is so reduced, Sir John, that you almost did not notice me.
I want to ask the Paymaster General two questions before she winds up. First, following on from what my hon. Friend the Member for Ludlow said, have the Government rejected the Treasury Committee’s recommendation in paragraph 109 of its fourth report which states:
“We recommend that the Government provide detailed information”?
If they have not rejected it, at what point did they provide the information before we reached clause 57 of the Bill?
My second question arises from the speech that my hon. Friend the Member for Rugby and Kenilworth (Jeremy Wright) has just made. Does a tax loss arise for the Government if the age remains at 25 and is not reduced to 18? If there is a tax loss, it seems to me that the Government have a legitimate interest in the ageat which trusts vest in the beneficiaries. If the Government have no interest whatever in the financial outcome, their position is somewhat less secure and they owe it to the Committee to provide slightly more reasons than they have so far as to why they wish to second-guess the beneficiaries.
The hon. Member for Hove (Ms Barlow) said that if we do not reduce the age to 18 that would erode the personal choice of the 18-year-old, but the personal-choice argument, as my hon. Friend the Member for Rugby and Kenilworth said, works both ways. If the age is reduced to 18, the personal choice of the person who currently has the assets—the beneficiary—is eroded. The Government should make a slightly stronger case.

Celia Barlow: The issue perhaps is not, as the right hon. Gentleman said, the personal choice of the beneficiary. What is in question is the right of the nation as a whole that the money should be taxed as other forms of income are taxed.

George Young: The point is that the Government are seeking to influence the personal choice of the donor by imposing a tax penalty if the age at which the trust vests is 25 and not 18. A number of my hon. Friends have asked what the argument is that forces the Government to reduce the age from 25 to 18 given that they may have no financial interest in the outcome. If the Paymaster General cannot produce a figure for the loss to the Government if the age remains at 25, their argument so far seems to be astonishingly weak.

Dawn Primarolo: Perhaps I could start by explaining the Government amendments and then return to the issues about misuse under certain circumstances of A and M and interest in possession trusts.
In the nicest possible way, I caution the hon. Member for Chipping Barnet against continually referring back to 1975 and what happened in that context. If she looked a little more closely, she would see that the context in which the 1975 rules were introduced with capital transfer tax was a background of every transfer from an individual during life or after death being liable to CTT. If she dug a little further, she would see that the technical debate at that time in connection with interest in possession trusts were treated as being earned by a tenant and were not subject to the mainstream periodic and exit charges in that context. At that time, trusts that were not a vehicle were subject to a series of changes that started in 1986—the hon. Member for Falmouth and Camborne touched on this when she hinted that the Liberal Democrats might want to abolish potentially exempt transfers—and were developed in 1987 through subsequent changes. That began a process that paved the way for some of the tax planning that the Government now wish to deal with.
This is the first opportunity that we have had to debate the schedule. Second Reading did not give us an opportunity, and we debated a new clause in Committee on the Floor of the House. I have no complaints about it, but the Opposition chose to debate a new clause rather than the clause and schedule. In those debates, I tried to make it clear that it was the Government’s intention to make progress in this area.
I shall deal first with the amendments themselves and then the points that the hon. Member for Ludlow and others made about the mischief. I shall do my best to describe the mischief without breaking taxpayer confidentiality. I am sure that Members will understand that some of these arrangements are long in the maturing—the time from when arrangements are put in place to when they take effect.
The amendments are specifically concerned with the provisions in the Bill for trusts for young people and, in particular, trusts set up when parents die and leave money to young children. It is true that there has been a good deal of reaction to the proposals in schedule 20, and it has focused on the rules for bereaved minor children. It may help the Committee if I explain what our legislation and associated amendments do and then turn to the Opposition amendments.
It is clear that the pre-Budget tax rules for A and M trusts were being exploited to avoid inheritance tax. I shall give examples later, as they are rather complicated. Opposition Members are trying to conflate the sensible financial planning that parents or grandparents might make for their children or grandchildren with the added advantage of getting around the inheritance tax laws. The provision is not about that. I do not have a trust, so I do not have one to declare. I have a will, but it is not very complicated as I will not be paying—not yet, I hope—inheritance tax on my estate. For most people, it is very straightforward.
It was clear that A and M trusts have been routinely used to shelter large amounts of wealth from inheritance tax for long periods of time. We are talking about money going into trusts in excess of the IHT threshold. We are not talking about somebody’s house, but about £285,000 going in to a trust with specific objectives in mind about the tax consequences of the trust.
A debate that we have had on many occasions in Finance Bills is about the development of tax-driven strategies, as opposed to sensible strategies that people would have engaged in anyway, all things being equal. That is what we are trying to get to in dealing with these arrangements.

Theresa Villiers: Will the Paymaster General give way?

Dawn Primarolo: I would like to make some progress, but I shall give the hon. Lady an opportunity later. I am trying to lay out the Government’s changes and why we have made them. I shall then come back to the abuse that we are attempting to deal with, and also the point about the age of 18 or 25.
Trusts are set up ostensibly to provide for minor children, but that often happens in circumstances in which there is no particular need for a trust—the sums involved being grossly disproportionate to those required to provide for the child and most of the trust assets being destined ultimately for other beneficiaries. However, let us park the difference between sensible planning that allows children to have a nest egg—quite a large one in some cases—and cases in which there are other beneficiaries.
I have repeatedly said that continued special provisions are justified when trusts for bereaved minor children constitute a way to protect children should they lose one or both parents, and that is precisely the situation with which the provisions of schedule 20 are designed to deal. The Government have also made it clear, as have I, that special tax rules for bereaved children should no longer apply when children reach adulthood at 18. It seems to me that however much to-ing and fro-ing there is in the Committee, the age of maturity is 18, and the point is the age of interaction with the tax system, rather than whether parents want to tell their children that they cannot have the money.
Mrs. Villiersrose—

Dawn Primarolo: I shall not give way, because it is important to advance the Government’s case so that people are clear what is happening. I did not say that others did not have faith in young people; what I said was that I have more faith in them. The disservice is done by saying that none of them is ever entitled at the age of 18, regardless of circumstances—[Interruption.] Good, because that leads us on to the Government amendment. I do not accept that people are so irresponsible that they cannot be trusted with their own inheritance once they become an adult.
Mrs. Villiersrose—

Dawn Primarolo: No, I will not give way. Please allow me to advance my case. The discussion is going to be a long one and it is important that the Government’s approach be put on the record on the first occasion.
I draw the attention of Opposition Members to the rules applying to trusts that pay income tax and capital gains tax. Special tax treatment ends when a bereaved child reaches adulthood at the age of 18. My hon. Friend the Economic Secretary has referred to child trust funds.
I remind the Committee that there is nothing in the Bill that forces settlors or trustees to do anything whatever. The Government are providing a specific inheritance tax regime for trusts for bereaved minor children and it is subject to the conditions that we regard as appropriate. If people do not wish to meet the conditions, they can still set up a trust and pay some tax under the relevant tax legislation conditions. In other words, they will simply fall within the mainstream rules that apply to any other trust.
The Government have tabled amendments that refine the provisions in this area—amendments that are necessary to ensure that the legislation accurately reflects the Government’s intention on the treatment of trusts for bereaved minors. Opposition Members were not inclined to agree when I said that that was my intention and the Government’s intention, but it is. As drafted, the Bill requires parents to decide in advance in their will whether, if they should die, the trust that they have established for their children should end at 18 and receive special treatment, or end at a later age and not receive such treatment.
The Government have always recognised that that can be a difficult judgment, and I entirely agree with the points that some Members made. Particularly if one is settling something on the child when they are very young, it is difficult to decide whether, at 18, the child will be alright, but the point that we are advancing is that we should not assume that they will not be. However, I understand—the point has been put very well—that people want their trustees to have some flexibility, so that they can decide to hold back the full entitlement to an inheritance past the age of 18 if that seems appropriate to them in the circumstances.
Just to remind us, A and Ms terminate at 25—well, they are supposed to; we will come to that. That is the Government’s view. People often overestimate the risk that such a deferral will ultimately be needed. When people talk about what is in wills, we have to remember that they are a sort of precautionary principle—just in case. Presumably, in the case of most wills, the children are not bereaved before the age of 18; in fact, their parents go on to live happy and long lives. The question is whether our intention has always been to allow a degree of flexibility, and whether that flexibility can be provided in a manner consistent with our objectives.
The amendments tabled by the Government make sure that the legislation for trusts for bereaved minors operates in line with our intentions. When a trust that is set up for a child in the event of the death of their parent is set to run on until the child is 18 and 25, the amendments provide that charges—as the hon. Member for Chipping Barnet acknowledged—will apply only after the child’s 18th birthday. Amendment No. 384 makes it clear that the term “parent”, in the context of a new trust for bereaved minors, extends to step-parents. Taken together, the amendments mean that the rules will operate fairly, but of course if there is an absolute disagreement on whether the age should be 18 or 25, that cannot be resolved in this Committee; that is where the Government stand on the issue.
The amendments tabled by the Opposition appear to be designed to achieve a number of different but related effects. One set of amendments—Nos. 272 to 279—allow trusts for minors to run on through to the age of 25 as a matter of course. The Government do not accept those amendments, and I have explained why. It is clear that if we provided for that, the maximum age would in practice become the standard age, and that is how the system operates under the existing rules. I have already explained why the Government believe that the special tax rules for children should end at adulthood, at 18.
Another set of amendments in the Opposition’s name—Nos. 287, 290 to 294 and 297—seek to shelter existing A and M trusts from the new charges. There is no justification for that. The mainstream charge will not arise on the existing trusts until the end of the transition period in April 2008, and even then charges will only start to accrue when such a trust goes on after the child has reached 18. That seems a perfectly reasonable arrangement and I see no reason to go further.
The remaining Opposition amendments in this group—Nos. 280 to 282, and 284 to 286—seek special treatment for A and M trusts if the beneficiary becomes entitled to the income, but not the capital, when the young person reaches 18. I think that the hon. Member for Chipping Barnet sensed that that was open to manipulation, and so did not particularly want to speak to that point. As we discussed in our earlier, broader debate, the heart of the issue is that the gift is controlled.
I shall conclude my points about the amendments before coming to the abuse. I hope that I have clarified matters for the Committee. The course of action that I propose is fair and proportionate and offers a way through, particularly in respect of the issues about parents of much younger children setting trusts up and not having to look forward to decide what might be the case when the children reach 18. Allowing flexibility for trustees is a sensible way forward.

David Gauke: The Paymaster General stated that the question was about whether the legislation accurately reflected the Government’s intention, which was to allow flexibility. Will she clarify something? Has the Government’s intention all along been to allow flexibility, but in its original drafting the Bill woefully failed to do that, or have the Government changed their intention in favour of flexibility and amended the Bill accordingly?

Dawn Primarolo: On the issue of 18 to 25, it was, on reflection, a little harsh to start the charge immediately, so we are making the relevant changes. On flexibility, as I have said during Second Reading debates and in Committees of the whole House, I have always tried to concentrate on the point at issue, which is when the tax system engages. I have acknowledged that trusts are made for many reasons that have nothing to do with the tax system, and there is no intention to disturb that. It is a question of when the tax system engages.

Theresa Villiers: Will the Paymaster General give way?

Dawn Primarolo: I will, but I should like to assure the hon. Member for Ludlow that I shall return to his point, if other Conservative Members allow me.

Theresa Villiers: I still do not feel that the Paymaster General has explained why the shift in the vesting age addresses the point about which she is concerned. A number of her comments seem to have been predicated on anxieties about the potentially exempt transfer system. Are the proposals in schedule 20 a prelude to a Government proposal to get rid of the potentially exempt transfers? What is it about a vesting age at25 that gives rise to the possibility of abuse when that is not present for a trust for which the vesting age is 18?

Dawn Primarolo: If I address the issue of abuse, perhaps that will answer the hon. Lady’s questions. Unfortunately, I fear that whatever I tell her, she simply does not believe me. I explained that the changes under discussion and those we made elsewhere were part of a longer process of making sure, whenever possible—as the hon. Lady has acknowledged, the area is incredibly complex and at least a modicum of simplification, and a modicum of standardisation of rules across trusts, should take place.
In this area, we were also looking to deal with a small number of specific cases, which caused people to fear the worst, hence the sense that somehow we were going to deal with potentially exempt transfers. People feared that something huge was happening when it was not. Let us not go back over what helped to contribute to those perceptions; I have advanced my view.
We should look first at what has been said. I dealt with the question of retrospection, and the date is April 2008. On 10 May, a leading accountant appeared before the Lords Economic Affairs Committee. He comments a lot on Finance Bills, and has done for many years. He said that many of the professionals are exaggerating the problem, and that the problem for the Government was that if they had consulted when they were dealing with what they perceived to be an avoidance mechanism, there would have been forestalling, and dealing with the problem would have been more complicated.
In the context of all those millions being bandied about, the Treasury Committee rightly questionedhow the estimates were achieved. Under the new rules, A and M and IIP trust charges apply on trusts with assets exceeding the inheritance tax threshold of £285,000. Anything under that is not affected. The transitional rules mean that pre-Budget IIP trusts are effectively grandfathered. So, taking into account the exemption for trusts with assets under the IHT threshold and the transitional provisions, it was modelled as best could be that there were about 100,000 discretionary and A and M trusts. Only some of them are A and M trusts, and of them, only some are large enough to be potentially liable for trust charges. Believe it or not, people do not actually tell HMRC when they are making financial arrangements to try to get around tax charges for which they should not be making arrangements.

Theresa Villiers: Will the hon. Lady give way?

Dawn Primarolo: I shall just finish, because I want to give the examples of abuse. It was interesting that the hon. Member for Rugby and Kenilworth (Jeremy Wright) talked about grandfathers and grandparents, and we are talking about inheritance tax so we need to be clear.
I want to give two examples of the type of arrangements. The first is in answer to the hon. Member for Ludlow, using an A and M trust in line. Grandparents put£1 million into an A and M trust in the name of their newborn grandchild. No IHT is paid when the trust is set up, and once the grandparents survive seven years, any potential IHT liability is wiped out. The trust is set to operate in accordance with the grandparents’ wishes, even after they have died. The trust is set up ostensibly to pay for the grandchildren’s education, but the child’s parents also have substantial wealth, so in practice, the contents of the trust are barely touched. At 25, theA and M trust, now worth £2 million, having been actively invested in, transforms into an IIP trust for the grandchild. No IHT is paid at that point. Trustees will follow the grandparents’ wishes in deciding how the now adult grandchild will benefit from it. The grandchild might eventually receive it outright, or alternatively, the trustees might decide to give the trust to someone else entirely. In the meantime, the trustees can make other payments to anyone else they feel like.
In summary, by putting money into a trust during their life, a wealthy grandparent has transmitted significant wealth down the generations without paying any IHT and while effectively retaining control of how the money and trust is used. If the £2 million had been left outright in a will and had attracted IHT at 40 per cent., the Exchequer would have been paid £800,000. This is not a debate about whether people agree with inheritance tax and with a tax on the estate of a person who dies. That is how it operates, and this is about making sure that it operates for everyone else.

Philip Dunne: The comparison should not be between the amount of money that the grandparent leaves in their will, because they have decided to gift their money at a much earlier stage, and as a result of the potentially exempt transfer, it escapes IHT. It could have been gifted outright, survived the seven years and there the money is: £2 million, once well invested. That is the comparison.

Dawn Primarolo: I agree, but the hon. Gentleman heard what I said this morning: it is not gifted. “Gifted” means complete control and Opposition Members are making a case in favour of there not being control until the age of 25. I shall give an example of how, even at 25, it finds its way somewhere else. At the heart of the matter is the use of potentially exempt transfers and the question of whether it was a gift—complete control—or an arrangement in name only, without the control and with directions on the use of the assets not coming from the person who is supposed to be the beneficiary of the gift.
Let us consider the example of an A and M trust on death. Grandparents state in their will that on their death £1 million will go into an A and M trust for their grandchildren. When they die, 40 per cent. IHT is payable on the grandparents’ estate, but moving the money into an A and M trust is the first step in a series of transactions—the interaction of A and Ms and IIPs—that could enable the money to remain completely free of IHT for several generations. IHT is not paid once for all the generations in a family: that is not how it operates.
At step 1, because £1 million was moved into atrust for grandchildren, a generation is skipped. Before schedule 20 was introduced, the A and M trust was completely exempt from IHT for as long as the money remained in the trust. At step 2, when the grandchildren reach adulthood, the trustee often sets up an interest in possession trust with the capital, which presumably led the hon. Member for Chipping Barnet to table her amendment that sought to separate the interest, as opposed to controlling the capital because it is the capital that can then be transmitted on to the interest in possession trust. The grandchildren do not have access to the capital. The trust remains free from inheritance tax and the trustees are able to make ad hoc payments out of the trust to any other beneficiary. Those payments are free from inheritance tax as long as the grandchild lived for seven years after the transfer.
However, at step 3, the trustees can resettle the capital in the trust to a new A and M trust for the grandchildren’s children. Again, those resettlements are free from IHT if the relevant grandchild survived for seven years. That pattern can repeat itself for as long as the money lasts.
In summary, wealth is put into trusts at the death of the grandparents. They ensure that they are sheltered from IHT for several generations, while at the same time ensuring that they effectively retain control over the assets indefinitely. That is the narrow mischief that the Government want to deal with in the schedule. As we deal with the rest of the amendments, we shall see how that matter plays out in relation to the different subject areas.

Philip Dunne: Will the right hon. Lady give way?

John Butterfill: Order. I think that the right hon. Lady has completed her remarks, but I also want to raise a point of order. Could I ask the hon. Member for Wirral, West (Stephen Hesford) to ensure that his communication device is not audible in future? I also remind all hon. and right hon. Members that the Chairman of Ways and Means has ruled that communication devices should not be used in Committee: that includes BlackBerrys and everything else. If anyone has a mobile phone or something similar, can they ensure that it is set to silent and does not interrupt the work of the Committee?

Stephen Hesford: Further to that point of order,Sir John, I apologise to you and other Committee members for that momentary lapse.

John Butterfill: Thank you.

Philip Dunne: I thank the Paymaster General for illustrating the mischief. I should like to make two points arising from her remarks. First, I believe that she said that the Treasury had modelled the number of discretionary trusts to which the measure might apply. I am pleased to hear that the Treasury is capable of doing some modelling. Will she please elucidate further by declaring the basis of the modelling and the assumptions that were used?

Dawn Primarolo: I apologise to the hon. Gentleman. I did not mean to mislead him. I told him how we settled and how I was advised on the number of trusts. I concede that that is difficult to do. That is our view and that is how we settled on those numbers. I should not like to lead him to believe that there is some economic model operating. I am sorry if that was the impression that I gave; that is not true.

Philip Dunne: I am grateful for that. It is clear that the Treasury has no idea how many trusts are involved and, therefore, has no clear idea of the extent of the mischief.
The Paymaster General gave the Committee some examples. I congratulate her on the complexity, particularly in her second example about assets cascading forever, potentially, from generation to generation. With regard to the second point that I was going to make, I should be interested to know how many instances of that type of thing have been reported to HMRC. I suspect that it is a very small number. As is so often the case with this Government, a sledgehammer is being used to smash a minuscule nut.

Rob Marris: I am grateful to the hon. Gentleman for giving way. I am not sure in the complex example given—I may not have understood it correctly—how the Government would ever know. That is the point of the example; there is no tax being paid.

Philip Dunne: I had finished my remarks.

Theresa Villiers: I should like to take the opportunity to respond to some of the points made by the Paymaster General. I remain concerned, like a number of my hon. Friends, about the Government’s assessment of the number of families and trusts affected by the proposals. As we shall see, in relation to the IIP provisions and the spouse exemption, the impact of the proposals will potentially be felt much more broadly than in the small fraction of the wealthiest of the wealthy that the Paymaster General envisaged being affected.
The Committee still lacks much information about how the Treasury reached its conclusion. Of course, had the Government chosen to consult on the proposals before introducing them, they would have had a much clearer understanding of who would be affected by them and we would not have a problematic schedule amended by highly complex amendments that still leave a number of people puzzled about how they work, as the hon. Member for Falmouth and Camborne explained. This is not the best way to write the tax law of this country.
I return to the point that I put to the Paymaster General, which is that the heart of her concern seems not to be the fact of setting up a trust, but the availability of a potentially exempt transfer. That seems to be the vice that she is concerned about. It is unfortunate that the trusts are attacked as a result of something that is available to outright transfers. There seems to be no justification for attacking a trust used for all sorts of responsible reasons, as I outlined in relation to clause 157, merely because of the application of the potentially exempt transfer system, which can be used in relation to outright transfers as well. Under the schedule—departing from many years of consensus on the approach to taxation—taxation of trusts will be more penal than the situation that is applicable to outright transfers.
Returning to the 18 to 25 age issue, the Paymaster General was focused on schemes that she saw as abusive. She has not yet answered the concerns expressed by a number of my hon. Friends on the right of parents to take a decision about how much wealth to pass to their children. She says that no one will be forced to transfer wealth to 18-year-olds, which is correct in a literal sense, but the reality is that if a penal tax charge is imposed on an existing trust, which can be relieved only by changing the vesting age to 18, that is likely to put pressure on parents to do so. As I said, the amendments would mitigate the size of the tax penalty so that it would no longer be such a significant problem. The changes to the IIP regime, which the Paymaster General is also putting forward, would mitigate the problem because parents and grandparents would have the option to set up IIPs on death.
I suspect that with existing A and Ms and the 4.2 per cent. tax hit that is envisaged in the schedule as the Paymaster General proposes to amend it, many parents will decide to take the hit. They may prefer to pay the tax rather than see wealth vested in their children before they are mature enough to cope with it. Contrary to the assertions made by a number of hon. Members, the Opposition are not saying that every 18-year-old is incapable of handling their own money. Many 18-year-olds may be mature enough to cope with vast quantities of cash, although I am not sure that they are that common. We are obviously not saying that no teenager is capable of handling money. But we are saying that the people who are best placed to decide when teenagers should get the money are their parents, not the Government.

Helen Goodman: The hon. Lady has made much of the point about parents deciding about the maturity of their children. Will she suggest the age that children need to reach in order for parents to make such a judgment? It would be ridiculous for parents to make that judgment when the children were only five, but would the parents be in a position to do so when the children were aged 15? The reality is that such judgments are made more than 10 years before anyone is 18 or 25.

Theresa Villiers: There are many ages at which a parent could make a decision on how responsible a child is likely to be at 18.
Turning to the point that the Economic Secretary made repeatedly—that the child trust fund vests at 18—my understanding is that parents cannot claim tax credits until they are 25, so there are other ways in which the law recognises the higher age. [Interruption.] I am prepared to be corrected, but I understand that some tax credits are not payable until the age of 25. No doubt the Paymaster General can explain the correct position.
A number of my hon. Friends mentioned the last-minute tabling of the amendments. It has proved to be a challenge to consider them in the short period before they were discussed in Committee and I hope that there will be an opportunity to return to the matter on Report if they have significant defects. During the period before Report, I hope that we can have a little more clarification on how they will work.
I am still unsure about whether the relief for existing A and Ms will apply to trusts where neither parent is deceased or whether it is restricted to A and Ms where there is one deceased parent. If the Paymaster General can give me an indication one way or the other it would be useful because it has a significant impact on how positive the changes provided by her amendmentswill be.
I think that that more or less concludes what I wanted to say. I reiterate our concern about the amendments. Many parents who are faced with the choice will probably retain the vesting age at 25 and pay the tax. That is further proof of the critique of these proposals that the Opposition made from the outset: that in the main the vast majority of trusts that will be hit by schedule 20 as drafted are motivated not by tax considerations but by prudent families trying to provide responsibly and sensibly for their children and their relatives. That is why I propose to press our amendment to retain a vesting age of 25 and to disapply the retrospective effect to current A and M trusts.

Julia Goldsworthy: I have a couple of brief points. During her earlier remarks, the Paymaster General referred to the fact that the Opposition chose not to call this matter for debate on the Floor of the House. I would imagine that the Government were relieved by that, given the number of amendments that they tabled and the time at which they tabled them.
I thank the Paymaster General for the examples that she gave. Unlike the hon. Member for Chipping Barnet (Mrs. Villiers), my concerns do not focus around the age at which individuals should have access to capital or income from trusts but around retrospection, which is my primary concern. I may not have heard the Paymaster General discuss that issue. I would appreciate her comments on why the Government chose to apply the new regulations to existing trusts as well as new ones. Clearly, trusts below the inheritance tax threshold may need to change to reflect the changes in the legislation in order to comply or if in the future they fall above the threshold. I would be grateful if she would clarify why it is not possible after 22 March to apply the legislation to new trusts only.

Dawn Primarolo: I thought I answered the hon. Lady’s point when I gave examples of how the trust structure was being misused. As existing trusts are the very point that we are trying to deal with, the obvious question is why the Government would countenance allowing all the trusts that are at present undertaking avoidance to continue to do so, given that the Finance Bill is about limiting damage. I thought I dealt with that.

Question put, That the amendment be made:—

The Committee divided: Ayes 10, Noes 24.

Question accordingly negatived.

Dawn Primarolo: I beg to move amendment No. 383, in page 111, line 21 [Vol II], leave out
‘to which section 89 below applies’
insert
‘in which a disabled person’s interest subsists’.

John Butterfill: With this it will be convenient to discuss the following: Government amendment No. 388.
Amendment No. 199, in page 116, line 41 [Vol II], at end insert—
‘(1A) After subsection (1) insert—
“(1A) This section also applies to settled property, whenever transferred into settlement, which is held on trusts in which an interest in possession subsists, and in which the person beneficially entitled to the interest in possession is a disabled person.” '.
Amendment No. 200, in page 117, line 1 [Vol II], after ‘means' insert ‘—
(a)'.
Amendment No. 201, in page 117, line 3 [Vol II], at end insert—
‘(b) an interest in possession in settled property to which a disabled person is beneficially entitled.
(2A) For subsection (4)(a) substitute—
“(a) a person who lacked capacity, within the meaning of the Mental Capacity Act 2005, or was expected to lack capacity at some time in the future;”.
(2B) In subsection (4)(c), omit the words “by virtue of” to the end.'.
Amendment No. 344, in page 117, line 3 [Vol II], at end insert—
‘(b) an interest in possession in settled property to which a disabled person is beneficially entitled.'.
Amendment No. 345, in page 117, line 3 [Vol II], at end insert—
‘(2A) For subsection (4)(a) substitute—
“(a) a person who lacked capacity, within the meaning of the Mental Capacity Act 2005, or was expected to lack capacity at some time within the following five years;”
(2B) In subsection (4)(c), omit the words “by virtue of” to end.”.'.
Amendment No. 346, in page 117, line 5 [Vol II], leave out from ‘the' to ‘a' in line 6 and insert
‘references in subsections (1) and (1A) above to a disabled person include, in relation to any settled property, references to'.
Amendment No. 202, in page 117, line 5 [Vol II], leave out from ‘in' to second ‘to' in line 6 and insert
‘subsections (1) and (1A) above to a disabled person include, in relation to any settled property, references'.
Amendment No. 203, in page 117, line 15 [Vol II], leave out from ‘allowance' to ‘had' in line 17.
Amendment No. 348, in page 117, line 21 [Vol II], leave out from ‘the' to second ‘to' in line 22 and insert
‘references in subsections (1) and (1A) above to a disabled person include, in relation to any settled property, references'.
Amendment No. 349, in page 117, line 35 [Vol II], leave out from ‘by’ to ‘rate’ in line 36.
Amendment No. 205, in page 117, line 41 [Vol II], at end insert—
‘(7) The references in sections (1) and (1A) above to a disabled person include, in relation to any settled property, references to a person who satisfies Her Majesty's Revenue and Customs that he would, when the property was transferred into settlement, have been entitled to an attendance allowance or a disability living allowance had he claimed it.'.
Amendment No. 206, in page 117, line 41 [Vol II], at end insert—
‘(3A) Sub-paragraph (2A) shall come into force immediately after section 2 of the Mental Capacity Act 2005 comes into force.'.
Government amendments Nos. 389, 390 and 392.
Amendment No. 207, in page 127, line 13 [Vol II], at end insert—
‘(iii) a disabled person's interest, within the meaning given by subsection (2A) of section 89 of that Act; or'.

Dawn Primarolo: The amendments relate to rules for trusts set up to provide for a disabled person. At the outset, let me briefly set out the broad purpose of the measure. As I said earlier, it had become clear that some individuals were using trusts—in particular, trusts set up by people during their lifetimes—to achieve an unfair IHT advantage. That is the primary source of IHT avoidance, which amendment No. 383 is trying to counter, and that is why the Government believe that it is right to bring the sorts of trusts that we have been discussing under the mainstream IHT rules for trusts.
However, the inheritance tax rules have always contained special provisions for trusts set up to provide for a disabled person. For people who find it difficult or impossible to cope with the demands of owning assets outright, a trust will often be the most practical way for substantial assets to be held. The rules recognise that, and in such circumstances treat those trusts in the same way as outright ownership. Trusts for disabled people are the only exception to the new rules for trusts set up in life. The Government have always tried to be clear that that treatment is justified. Furthermore, the Government took the opportunity in the draft Bill to bring the rules into line with the equivalent parts of the income tax and capital gains tax rules.
Government amendment No. 388, along with the consequential Government amendments Nos. 383, 389, 390 and 392, will introduce new sections 89A and 89B into the Inheritance Tax Act 1984. They will extend the relief in two further respects. First, the Government amendments make technical changes that will ensure that the rules operate for all types of trust set up for a disabled person. The old rules made explicit provision for discretionary trusts for disabled people, but not for interest in possession trusts for disabled people. An omission in the drafting of the Bill meant that some interest in possession trusts for disabled people might not be brought within the new rules. That is clearly not what was intended, and the amendments rectify the situation.
Secondly, the amendments extend what is already in the Bill to cover people with degenerative illnesses. I am talking about people who do not yet fall within the definition of “disability” in the rules, but who have good reason to expect that they will shortly be incapable of dealing with outright ownership of their assets. There are good arguments for the use of a trust in such cases, and our amendments will extend special treatment to trusts set up for people in those circumstances for their own future benefit.
Turning to Opposition amendments Nos. 199 to 203, 205 to 207, 344 to 346, 348 and 349, I am pleased to say that the Government amendments make the same technical changes as many of the Opposition amendments, particularly amendment No. 344. However, I am afraid that the other amendments in the group would modify the Bill in ways that we do not propose to accept. One theme in the amendments is to replace the current reference to people who are incapable as defined under the Mental Health Act 1983 with something based on a notion of capacity within the Mental Capacity Act 2005. While I sympathise with the desire to keep the tax code up to date with developments in non-tax legislation, I do not consider that those particular changes would really improve matters.
First, the amendments raise doubts over the continuing eligibility of trusts already in existence that qualified originally for special treatment by reference to the provisions of the Mental Health Act 1983. The majority of the trusts in question will fall into that category for many years to come. Secondly, the Mental Capacity Act 2005 is not yet in force, which would mean a delay in introducing the provisions for disabled trusts. Thirdly, even when the Act does come into force, it will be effective only in England and Wales.

Theresa Villiers: If the Paymaster General is worried about the impact of trusts that qualify at the moment under the terms of the Mental Health Act 1983, could not transitional provisions be included to ensure that they continued to receive the same treatment? As for the point that the Mental Capacity Act 2005 is not yet in force—it is not expected to be for another couple of years—it would be a problem if we were to postpone the implementation of the definition for that period, which one of the amendments tabled by the hon. Member for Falmouth and Camborne proposes. It would leave the trusts in limbo. The Mental Capacity Act received Royal Assent, but the fact that it is not yet in operation does not stop the Bill cross-referring to it.

Dawn Primarolo: The final important problem is that the amendments make a fundamental mistake about how the Mental Capacity Act is meant to work when the amendments refer to an individual who lacks capacity. The whole point of the Act is that capacity is not an all-or-nothing issue. People may lack the capacity for dealing with some matters while remaining quite capable of dealing with other aspects of their life. The Act is designed to ensure that affairs should only be interfered with to the minimum possible extent, so any reference to it would have to spell out precisely what sort of matters a person would have to lack capacity to deal with in order to qualify for the special IHT treatment. That would be especially difficult when looking ahead five years along the lines of the Opposition amendments.
We have discussed what Act is the most appropriate to use at different points of the tax system with regard to mental health. It is difficult to see how that can be made to work without attempting to put hugely complex and probably highly subjective statements and definitions into tax legislation. The Government’s view is that the existing legislation works perfectly well by reference to the Mental Health Act.
It is also suggested that we should allow someone to set up a disabled trust if they can show HMRC that, when the trust was set up, the disabled person would have qualified for the allowance if they had claimed it. I am reluctant to accept the amendment for a practical reason. HMRC is capable in many ways—never a truer statement—and the growing department is handling more and more. However, it is not equipped to reach medical judgments on whether an individual would in the past have been capable or able to claim attendance or disability living allowance had they decided to do so. We have had similar discussions when considering different Finance Bills and that has always been my view. It is not a poor reflection on HMRC. I just think that there are limits.
If someone were thinking of setting up a trust for a disabled person, I am sure that arrangements could be made for that person to submit a claim if that were believed important for tax purposes. We have discussed that in relation to other parts of the Bill and other tax legislation. It may only be necessary when the amounts involved exceed the inheritance tax threshold—currently £285,000, rising to £325,000 in 2009.
The final substantive proposal in the Opposition amendments would extend the scope of IHT provision to beneficiaries who have any form of entitlement to disability living allowance, rather than restricting it as at present to those who are eligible specifically for the care component of DLA at the highest or middle rate. That might reflect a straightforward difference of opinion between the Government and the Opposition.
The IHT reliefs have never been designed to deliver extra resources to disabled people on account of their disability. It is clear that many people who suffer some degree of disability as a matter of general law may have no material difficulties in handling the financial aspects of their life. That is true for many people who are entitled to disability living allowance but who do not currently fall within the tax definition. The mere fact that an individual has a mobility problem does not mean that they cannot handle their own finances, and to assume otherwise would take us down a difficult and unhappy route—one that tax legislation took in the distant past, when judgments were made about the capacity of individuals.
The definition in the Inheritance Tax Act 1984 is the same as the definition for income tax and property gains purposes, which itself has only recently been subjected to extensive consultation. There is a surprise. The consensus in that consultation, which included contributions from a wide range of groups representing the disabled, and some large charities for the disabled, was that the definition used by the Government is the right one.
I hope that I have explained the Government amendments. I can see the desired effect of the changes proposed by the hon. Member for Chipping Barnet, but the route she suggests would be a difficult one to take at this point. The Government have taken care to ensure that the rules for disabled people’s trusts will operate fairly and practically. The amendments do not provide for a better system—they could lead to a more difficult situation and could have some unintended effects.

Theresa Villiers: I thank the Paymaster General for her thoughtful account of her own amendment and for her discussion of my proposed amendment and the amendment in the name of the hon. Member for Falmouth and Camborne. Members of the Committee will notice the overlap between the amendments tabled by myself and her. Some of them are identical, and both are based on those contained in the useful briefing that was circulated by members of the Low Incomes Tax Reform Group, which has worked with a number of organisations on the matter.
The group has expressed grave concerns that the provisions in the Bill could have a negative impact on a number of vulnerable groups. I emphasise that the amendments do not imply that the disabled are incapable of managing their own affairs—far from it. The Opposition amendments are designed to give to the disabled every facility to use trusts when they feel that it would be in their best interests to do so, and I understand from a number of groups that work closely with those affected by disability that the trust device is an extremely useful one for many of them in dealing with their daily lives.
6.15 pm
We are looking at the carve-out in section 89 from the new inheritance tax charges. There is concern that the carve-out is too narrow even with the small extensions proposed in schedule 20. It has even been assumed that the Government’s amendments go through to schedule 20 as well. The Low Incomes Tax Reform Group is concerned
“that the definition of disabled person used in the proposed legislation...should be correctly targeted at people who, because their disability prevents them from handling their own finances, need and want their affairs to be conducted through the medium of trusts.”
Organisations such as that group believe that the definition is too narrow, hence my amendments and those tabled by my hon. Friends to broaden that definition.
Prior to the Budget, the section 89 carve-out received little attention and was seldom used. It has only become more important with the imposition of new charges on a range of other trusts. It has grown in significance. Prior to the Budget, most people who set up trusts for disabled children or relatives chose to set up life interest trusts. They were considered simpler and more user-friendly than the rather clunky discretionary trusts that could be used within section 89. Typically, trusts for the disabled are set up inter vivos—during the lifetime of the settlor. Therefore, given the changes in the Budget, they will attract the new charges, unless they fall within section 89 or within the scope of the Government amendments tabled in the past few days.
I welcome the move to embrace interest in possession trusts, which is envisaged by the Paymaster General’s amendments. The problem with section 89 and schedule 20, as originally drafted, is that it provided for discretionary trusts under section 89 but did not provide for interest in possession trusts; and it did not allow disabled people to set up trusts over their own property. Schedule 20, as drafted, would apply the new charges to such trusts because they are set up inter vivos and trusts set up during the lifetime of the settlor will attract the new charges, unless they can be fitted into the carve-out.
I turn to the problems in relation to the definition of disability that the Paymaster General has already outlined. Organisations such as Mind, the Parkinson’s Disease Society and the Low Incomes Tax Reform Group are concerned about the limits set on the people who are considered to be disabled for the purposes of the new IHT regime. There is the question whether it is appropriate to include a definition from the Mental Health Act 1983 as opposed to the more up-to-date legislation contained under the Mental CapacityAct 2005. There is also the matter of the limitation to people who are in receipt of attendance allowance or disability living allowance by virtue of entitlement to the care component at the highest or middle rate.
There is another definition of disability used in statute. It is not contained in the amendments because it was felt to be too radical. However, under the Disability Discrimination Act 1995, the definition of disability is:
“a person has a disability for the purposes of this Act if he has a physical or mental impairment which has a physical or mental impairment which has a substantial and long-term adverse effect on his ability to carry out normal day-to-day activities.”
The Low Incomes Tax Reform Group cites that broad definition in contrast to the restricted definition on which the Government are relying. It highlights a number of groups that will fall outside the categories proposed in schedule 20 and section 89, including people who receive one of two mobility components of DLA, those who get a lower-rate care component of DLA—people who need an hour’s care or more a day, but not frequent care—non-claimants who would have been entitled if they had claimed, as the Paymaster General mentioned, and people who are not mentally disordered, but have a partial capacity or who have a progressive illness and need to organise their affairs in advance to take into account the deterioration of their condition.
The group also highlights concerns about people who have fluctuating capacity, such as those with periodic attacks of mental illness. In particular, beneficiaries under trusts set up over personal injury damages or money from disaster funds who may have a high mobility component and a lower care component of DLA are excluded. Falling outside the scope of section 89 means that their trust funds will suffer the 10-year charges and exit penalties, so it is important to get this issue right.
Schedule 20 could also mean that similar charges apply to trusts set up for the benefit of people with progressive illnesses such as Alzheimer’s, which is also an important matter. Those with fluctuating conditions such as depression or schizophrenia may also be outside the scope of the definition since their conditions may not be serious enough to deprive them of capacity as set out in the Mental Health Act 1983.
Of course there are other options for dealing with the situation of disabled people or those who lack capacity. It is possible to protect vulnerable beneficiaries of that nature via an enduring power of attorney or the Court of Protection. Those options are important, but they may not be an adequate or suitable way to deal with the needs of many people. In particular, the Court of Protection route is highly prescriptive and very expensive, and an enduring power of attorney suffers the drawback that it is granted to an individual. If anything happens to them, they may not be available to deal with problems. Therefore, it does not have the flexibility of a trust in all cases.
Neither the enduring power of attorney option nor the Court of Protection option caters well for people with a fluctuating capacity. Both options are important, but the Low Incomes Tax Reform Group states that there should continue to be the same choice available to vulnerable beneficiaries of the sort that we are discussing—that is, the same choice between use of trusts, enduring power of attorney and Court of Protection. It states that
“the determinant of the choice should be the best interests of the vulnerable beneficiary, not the vagaries of the tax system.”
As the Paymaster General said, I have tabled amendments—in some cases with the hon. Member for Falmouth and Camborne—that seek to deal with the problems that I have outlined. Amendments Nos. 199 and 201 deal with the life interest point by extending the carve-out in section 89 to cover interest in possession trusts for disabled people. Consequential drafting changes are made in amendments Nos. 200, 202 and 204. The result of the amendments would be that life interest trusts set up for people who count as disabled within the definition contained in section 89 would be free of the new entry and periodic charges. Such trusts would continue to be governed by the present rules, with an IHT charge on the death of the life tenant. The amendments would have that result regardless of whether a disabled person set up a trust over their own property or whether someone else set up a trust for them. Thus the amendments would also cover the self-settlement point, which I shall address later.
Further assistance in respect of self-settlement would also be derived from amendments Nos. 300 to 318, which we shall discuss in due course. They would put all self-settlement outside the scope of the new charges.
In the short time since the Government amendments in the group were tabled, it has not been easy to establish exactly how they will work, but it appears that many of the issues that I have outlined in respect of interest in possession trusts and self-settlement will be solved with adoption of the Government’s amendments. I welcome them as a response to the amendments that I tabled along the same lines.
It seems from the drafting and from what the Paymaster General said that new section 89B(1)(d) will make it possible for a disabled person to set up a life interest trust over their own property. That is a welcome move by the Government. New section 89B(1)(c) seems to provide that a third party can also set up a life interest trust for a disabled person. Again, the Paymaster General’s earlier remarks seemed to confirm that my understanding of that is correct. It seems that the primary problems with life interest trusts would be solved by the Government’s amendments.
New section 89A provides that someone who has a condition that is likely to lead to their becoming disabled can set up a trust over their assets. It seems to provide some comfort to those with degenerative diseases such as HIV, Alzheimer’s and Parkinson’s. With diseases of that seriousness, one would have thought that many of them would be able to show on the balance of probabilities that their condition would eventually lead to the ability to make the required benefits claims within the meaning of disability, or to bring themselves within the capacity definition that is contained within the meaning of disability for the purposes of section 89.
The Government’s amendments do not appear to resolve one problem concerning IIP trusts that those people with the degenerative conditions to which I have referred set up in contemplation of the onset of disability. Although the individual themselves can set up that trust, if their parents, relatives or other people wish to pay into it, they would have to pay the new IHT charges. I should be interested to hear from the Paymaster General whether I have understood that section correctly, because it would seem to be a drawback, preventing others from contributing to the trusts that the disabled person set up.
Although I welcome those moves, the Government’s amendments leave a number of other significant problems that have not been solved. I received an e-mail from Mind this morning, which confirmed its view on the matter:
“The sensible approach would be for the government to undertake a longer and more considered review of the issue relating to charges on trusts for people without mental capacity, people with fluctuating capacity and/or disabilities.”
The barrister, James Kessler QC, who is very much an expert in this area, said—in my view rather harshly—of the amendments:
“In my view, the new clauses offer about 1 per cent. of what is needed to give us a proper system of trusts taxation for the most vulnerable in society.”
The key drawback, as we have already heard from the Paymaster General, is that her amendments do not address the problems with the definition of disability.
My amendment No. 345 removes from section 89 the reference to the definition contained in the Mental Health Act 1983 and inserts instead a reference to the definition of mental incapacity contained in section 2 of the Mental Capacity Act 2005. There is a fundamental difference between the two. First, the Paymaster General has already referred to the fact that the Mental Capacity Act is more up to date. It represents more closely the current thinking on the issue, it was consulted on for about 12 years and it includes a good definition.
However, there is another serious distinction between the way in which those two statutes work. The 1983 Act is about deciding who should receive compulsory treatment—the criteria at the heart of it are about whether the person is a risk to themselves or others—whereas the 2005 Act is designed to be empowering and to focus on capacity and people’s ability to make their own decisions about their own lives.
I take on board the Paymaster General’s point that the test is more complex, and that it applies differently in different situations. The definition provides simply:
“For the purposes of this Act, a person lacks capacity in relation to any matter if at the material time, he is unable to make a decision for himself because of an impairment of or disturbance in the functioning of the mind or brain.”
That is a superior definition, and it relates more closely to the situation with which we are dealing: for example, the question about whether the person is happy and able to deal with their own affairs. That is a different criterion from that in the 1983 Act.
As I said in an intervention on the Paymaster General, it is not necessary as a matter of logic to postpone an implementation of a definition based on the 2005 Act. It may not be in force, but the definition is clear, and the fact that it is not in force does not prevent us from incorporating it in section 89 of the Inheritance Tax Act 1984. I agree that significant problems would arise if we were left in limbo without a definition for several months, because section 89 could not be used. As we have heard, the significant extension of the new IHT charges will mean that the importance of section 89 will be increased, and it would be very difficult if the disabled were prevented from using it.
My amendment No. 345 would not only substitute an up-to-date definition of mental capacity, but provide protection for people who are expected to lack capacity at some point in the following five years.
I note that the hon. Member for Falmouth and Camborne has tabled amendment No. 201, which is similar to mine. I prefer my formulation; hers could be interpreted very widely, because it brings into the definition anyone who might be expected to lack capacity in the future. On the balance of probabilities, we are all eventually likely to lack capacity, even if only during our closing illness. By limiting the carve-out to those instances in which incapacity is likely to follow within a particular period, my amendment focuses more clearly on the concerns about degenerative illness and fluctuating capacity that I have outlined.
Amendments Nos. 203 and 349 widen the definition of the benefits relevant to determining whether someone falls within the definition of “disabled”. They would delete the restriction to those claiming the highest or middle rate of the care component of the disability living allowance, and therefore allow someone claiming the low component of the care allowance to be included in the definition. Amendment No. 205 provides that people who are entitled to attendance allowance or disability living allowance will qualify under that provision, even when they are not claiming it.
It seems arbitrary to base the criteria on those who choose to claim benefits, rather than those entitled to claim them. I acknowledge the administrative implications of the change that agreeing to my amendment would involve, but I hope that the Government will consider it, given the importance of the issue. We have inherited the definition of “disabled” from a tax statute that dates back many years and is in pretty dire need of updating.

Dawn Primarolo: I want to help the hon. Lady so that she does not dig herself into a very deep hole. The Government consulted extensively on the definition with charities and groups representing the disabled, and that is how we arrived at the definition of “disabled” for income tax and capital gains tax purposes. We have simply used the same definition here. The hon. Lady has cited organisations that took a different view, but in that consultation, 41 organisations advised the Government to go the way that we have gone. I entirely accept that there are different views, but there are substantial organisations that say that we are using the definition that we should.

Theresa Villiers: I am grateful to the Paymaster General for that, but the organisations to which I referred are concerned. The National Autistic Society also has concerns and a number of organisations have written only very recently to the Treasury to ask it to consider the issue again.
I acknowledge that the Government amendments help to mitigate what would otherwise be the very damaging impact of schedule 20. Once agreed to, as I assume they will be, I hope that it will be possible for IIP interests to be set up for and by disabled people. However, those amendments will not protect vulnerable people who fall outside the definition of “disabled”, nor those struggling with addiction problems, who may wish to self-settle to protect their assets when they perhaps fall off the wagon.
Nor will the amendments protect people who may be mentally vulnerable but are not so seriously ill as to lack capacity. A classic example would be manic depressives. On its website, Rethink, the charity that campaigns on mental health matters, sets out some of the reasons why those with mental health problems might wish to set things straight on their use of their own property. It states that
“Debt can also be brought on by symptoms of the illness itself. People with mania sometimes believe they are rich and go on spending sprees and people with depression commonly spend money in an effort to make themselves feel better. Conversely, people with depressive symptoms may withdraw and ignore official letters, appointments and bills often leading to mounting debt and a decrease in income.”
Trusts can be an invaluable support to those people and their families struggling with mental illness and addiction.
I welcome the concessions made by the Government, but I do not believe that they have gone far enough. There is still a danger that the punitive charges under schedule 20 could be levelled at vulnerable people. The bar on self-settlement, particularly, poses significant problems for vulnerable people.
Finally, I shall quote a letter sent to the Treasury just a few days ago by the organisations that I mentioned: the Low Incomes Tax Reform Group, Mind, the Parkinson’s Disease Society, the Chartered Institute of Taxation, the Institute of Chartered Accountants, the Law Society, STEP and the National Autistic Society. In supporting the changes put forward by the hon. Member for Falmouth and Camborne and me, it says:
“We are not seeking favoured tax treatment, but to protect vulnerable trust beneficiaries from incurring a tax penalty that they would not have incurred before Budget Day. There are so many inconsistencies in the definition in”
section
“89 that we firmly take the view that legislation cannot go forward as currently drafted without causing severe prejudice to vulnerable beneficiaries and discrimination between different classes of disabled beneficiary, some of whom may qualify as disabled under the definition and some of whom will not. I hope that the government will listen to their appeal.”

Julia Goldsworthy: Given the similarities between many of my amendments and those of the hon. Member for Chipping Barnet and her colleagues, I shall not dwell too long on the same ground. However, I have a few remarks to make. Like the hon. Lady, I can see some benefits in the Government amendments dealing with some problems, including situations where, if the Bill progressed as it is, trusts set up for disabled people by means of a life interest in possession trust—not a discretionary trust—would have been liable to charges that would have depleted funds set aside for their medical and care needs. However, the key issue is the definition of “disability”, and eligibility to fit within this regime.
We have heard plenty of contributions. The Bill currently defines a disabled person, according to the Mental Health Act 1983, as
“a person who by reason of mental disorder within the meaning of the Mental Health Act 1983 is incapable of administering his property or managing his affairs, or...a person in receipt of attendance allowance...or...disability living allowance...by virtue of entitlement to the care component at the highest or middle rate.”
The 1983 Act will be repealed when the Mental Capacity Act 2005 comes into force in April 2007. As has already been said, that should not preclude the definition of the 2005 Act being used in the Bill.
There is an argument for using the more inclusive definition, because there is also an issue about whether there is consistency with other areas. Section 1 of the 1995 Act defines as disabled a person with:
“a physical or mental impairment which has a substantial and long-term adverse effect on his ability to carry out normal day-to-day activities.”
The Department for Work and Pensions consultative paper “Delivering Equality for Disabled People”, at paragraph 5.4, sets the standard for policy making and legislative drafting in relation to disabled people:
“The Government considers that the definition used in the Disability Discrimination Act...is most likely to be suitable for public authorities working to promote equality.”
I understand that there have been representations to HMRC and it has said that the definition is too wide. If we are looking for consistency across Departments and consistency of treatment, surely we need the definition to be applied uniformly.
The current definition will exclude some people—the relevant groups have already been mentioned—and affect people with fluctuating conditions, which could include mental health problems, such as schizophrenia or depression, and physical disabilities, such as multiple sclerosis or muscular dystrophy. These issues have still not been addressed by the Government amendments, although, to some extent, they have been looked at.
I should like to mention that, under the definition in the Bill, referring to the 1983 Act, reference is made to the definition of the situation where somebody has to be in receipt of attendance allowance or disability living allowance. I am sure that the Paymaster General was aware that not all the people entitled to those benefits claim them. There is a concern that those people may fall through that gap.
On Conservative amendment No. 345, which is similar to amendment No. 201 that imposes a five-year time limit, again, people with fluctuating conditionsÂ may not qualify, but in future their condition may degenerate to the point where they would benefit from having access to such beneficial treatment. Given the long-term nature of some conditions, it is appropriate to retain the situation as it is.
The Government improvements are welcome, but there are still considerable areas that are problematic and need to be addressed.

Brooks Newmark: I shall speak to amendments Nos. 201, 345 and 205.
First, on amendments Nos. 201 and 345, it is unfortunate for the Government that we are debating the potential impact of the proposals on the disabled and vulnerable during carers week and only a week after volunteers week. I mention that because I had the pleasure of spending some time last week at the Play and Resource Centre—

Sitting suspended for a Division in the House.

On resuming—

John Butterfill: Some hon. Members have complained that the cooling system is a bit too severe. This will be a democratic process, so may I have a show of hands from those who would like the heating turned up a little, and from those who would like it to stay as it is?
The result is fairly understandable. Having sat on the Government Back Bench in the past, I know that the air conditioning duct comes out directly on to the hon. Members sitting there. I suggest that the hon. Members for Llanelli (Nia Griffith) and for Worsley (Barbara Keeley) move to a slightly warmer position as the rest of the Committee seems to be adequately warm.

Brooks Newmark: Before we were so rudely interrupted, I was saying that last week I had the pleasure of spending some time at the Play and Resource Centre—PARC—in my constituency, which exists to provide support for children with a wide range of disabilities. It would be accurate to refer to all the children there as vulnerable, which is why they were playing in a protected environment. Many would also qualify as disabled, although that would depend very much on which definition of disability was chosen. However, I am not at all certain how many people, once they have reached 18, will be judged incapable by reason of mental disorder within the meaning of the Mental Health Act 1983. Yet some such children, if they are fortunate, and if their parents have the benefit of sound financial advice, may well become beneficiaries of trusts that have been established in order to protect their long-term financial interests.
I remind the Committee that we are not dealing with faceless abstractions. Not only have we all been lobbied by the usual professional bodies, some of which have been mentioned today, on the potential repercussions of the proposals, but we have all met with constituents who will be directly affected. In the week after this year’s Budget, I met with members of my local branch of Rethink, the mental health charity. At the time, some of the perverse implications of Budget note 25 were just beginning to dawn, so it is fitting that months later we have the opportunity to debate the proposals at length during carers week.
Trusts are widely recognised as one of the great achievements of English law but they are also often represented as a quaint anachronism, offering great opportunities for the idle rich to cheat the Revenue of its right and due. I am fortunate that one of my constituents is the chairman of the probate and estate committee of the Society of Trust and Estate Practitioners, known as STEP. He recently gave me some historical texture, when he told me that trusts originated from the need for crusading knights to leave someone in control of their property. There was no tax motive at all.
The Foundation for People with Learning Disabilities offers a less colourful justification for what remains a practical vehicle for asset management. It comments that
“Historically discretionary trusts were set up as a fund to pay for a few extras or luxuries that welfare benefits or Social Services might not provide or might not provide enough of.”
Trusts remain practical because they remain flexible, and the essence of such flexibility is threatened by the current proposals. The amendments aim to preserve something of that flexibility by ensuring that a sufficiently large class of vulnerable beneficiaries can make use of trusts without facing punitive taxation to which they would not be liable if they held trust assets outright.
Rethink has offered a compelling justification for the use of trusts. It has said:
“For people who are vulnerable to anxiety or psychosis it’s especially important for them to have a home and a regular income...But many people with mental health problems find it difficult or even impossible to cope with a benefit system which is too complex for most people to understand and which sometimes demands interviews or physical examinations as well as a great deal of form filling.”
Trusts actually answer this need by offering both stability and flexibility to meet the needs of those who cannot cope with their own financial affairs. As Mencap says:
“A trust is a useful way to provide for a person with a learning disability who may not be able to handle money left to them outright or who may be vulnerable to pressure from other people. The trust introduces a degree of protection because the trustees are in control over the trust fund.”
The degree of protection received by a beneficiary matches his or her changing needs—it is not an arbitrary, all-or-nothing solution in the vein of an enduring power of attorney.
The proposed amendments are modest given the number of those potentially affected by the current, overly prescriptive formula. Enlarging the class of disabled persons defined by section 89 of the Inheritance Tax Act to cover those in receipt of an element of the disability living allowances still falls far short of a comprehensive definition of those that society judges to be vulnerable. Furthermore, the definition of capacity derived from the Mental Capacity Act 2005 falls short of the broader definition that derives from the Disability Discrimination Act 1995. The question remains whether even that definition is adequate, because being vulnerable is not synonymous with being disabled.
The Low Incomes Tax Reform Group has argued that the definition derived from the Disability Discrimination Act 1995 is the most appropriate to the protection of the vulnerable. However, the matter of definition is best answered by the purpose to which trusts are best suited, not as a vehicle for sheltering assets from tax, but as a means of meeting fluctuating needs. As James Kessler QC noted, while the use of the Disability Discrimination Act is an improvement,
“in several respects the definition is too narrow”
because it still does not account for progressive illnesses or fluctuating capacity to which reference has already been made.
The failure to address progressive illness is indicative of a measure that is not progressive by any stretch of the imagination. On the contrary, the fact that it is retroactive has led to the charge from the Chartered Institute of Taxation that its provisions are probably the most inefficient in history. Most worrying of all are the reservations that Mr. Kessler makes in connection with the definition drawn from the Disability Discrimination Act, which is that addictions and substance abuse are not classified as impairments. Many of those whom we think of as vulnerable are neither disabled nor lacking in mental capacity. It is a class of people that includes the naive and impressionable as well as the dissolute and insatiable.
Since the Paymaster General believes that the Bill will affect only a small number of the super-rich, it is perhaps fitting that I draw an example from that set of people. When the seventh Marquess of Bristol, dubbed by the “Oxford Dictionary of National Biography” with the simple epithet of “wastrel”, died in 1999, it was discovered that he had left almost nothing remaining from an estate that had been estimated to be worth some £40 million. Even as The Times gloated, “Junkie marquess died penniless after spending millions on drugs”, the dictionary was more phlegmatic, commenting that the true fatality lay not in the genes, rather in too money much too early. Lurid newspaper headlines aside, it is apparent that the management of money presents its own challenges to the vulnerable, and that vulnerability shows many faces.
I have quoted perhaps an extreme example and not one, I think, that will attract much sympathy—from either side of the House. However, it serves as a warning that the decision to settle assets on trust or to make an outright gift should be tax neutral and made solely in the interests of the beneficiary’s potential protection.

Helen Goodman: Surely the case that the hon. Gentleman has made is for absolutely swingeing inheritance taxes with rates of, say, 90 per cent.

Brooks Newmark: I am sorry to say that the hon. Lady misses the point of what I am saying. I was drawing attention to mental capacity or incapacity.
The amendments would at least go some way towards widening the definition of disability—that is what I am talking about—for the purposes of section 89 of the Inheritance Tax Act. They would address the issue of progressive or fluctuating capacity by being forward looking. They would also remove artificial distinctions brought about by the restriction of the qualification of disabled persons trusts to recipients of only certain components of the disability living allowance. However, there will still be a lacuna affecting many vulnerable people who remain outside the scope of the amendments. Meanwhile, the cost of the changes will be borne by those least equipped to handle them and the gain to the Exchequer will be inconsiderable. Moreover, not for the first time, of course, the only true beneficiary of the changes will, unfortunately, be the legal profession itself.
I come now to amendment No. 205. We have heard that, broadly speaking, two categories of disabled person will be recognised as beneficiaries of a disabled person’s trust. The first relies on a stringent, punitive and unworkable definition from the Mental Health Act 1983 and the second relies on the necessity of being in receipt of certain benefits. It is hard to think of a more demeaning provision to include in a Finance Bill than the decision to define a disabled person either as incapable by reason of mental incapacity or dependent on the state for benefits.
The very purpose of trusts for the vulnerable and disabled is prudence and empowerment: prudence, as the Economic Secretary well knows, on the part of families looking to provide for vulnerable relatives, and empowerment for those who are thereby given a measure of financial security. It is true that the Government have tinkered a little with the definitions found in section 89 of the Inheritance Tax Act 1984. Relief in the tax regime applicable to discretionary trusts has been extended to those who cannot receive either disability living allowance or attendance allowance because they do not satisfy the residency requirement or because they are undergoing treatment for renal failure.
However, it is peculiar that the Government have introduced legislation that—we are told—started life as an attempt to tackle tax avoidance, but has ended up requiring the needy to be in receipt of benefits in order to avoid punitive taxation of assets held on trust. It is nothing short of absurd to suggest that disabled people must be in receipt of benefits from the state in order to be able to make use of the assets that should be free to be applied to meet their needs.
Disabled people who choose to live on their own income instead of making use of their entitlement to benefit from the state will, in future, be doubly penalised. They will lose the income that they might have enjoyed if they had decided to apply for it, and they will be penalised again because their choice subsequently places them outside the narrow definition of “disabled person”, so their assets will become subject to tax.
Let me offer a hypothetical example. A “disabled person” within the meaning of section 89 of the 1984 Act chooses not to apply for either the disability living allowance or attendance allowance despite being eligible for one of those benefits, and lives instead on trust income. There might be many reasons for not applying, ranging from a desire not to be a burden on the state, to an unwillingness to engage with the ever-increasing complexity of the benefits system. For whatever reason, that person decides to forgo their right to benefits and the direct consequence is that they are at least £41.65 per week worse off. However, that loss of £41.65 pales into insignificance when compared with the indirect cost of tax liabilities which result because they fall outside the definition of a “disabled person” as a result.
We have heard in the past that the Government are taking steps to increase the uptake of benefits, but there is such a thing as going too far. I cannot believe that it was the Government’s intention to predicate a tax exemption for “disabled persons’ interests”, which is already too narrow to be of any practical use, upon the mandatory uptake of benefits. I cannot accept that it is right to force the vulnerable into the jaws of the benefits system against their will merely in order to safeguard their own means.
It might well be argued that the number of people who fall within section 89 of the 1984 Act, by virtue of being eligible for disability living allowance or attendance allowance, but who do not choose to claim, is very small. However, we should not be tempted into thinking that small numbers justify shoddy legislation. Even if the Government remain committed to the restrictive formula offered by section 89 of the 1984 Act and its proposed amendments, the mere eligibility for benefits should be sufficient to qualify as a “disabled person’s interest”. Amendment No. 205 will ensure that eligibility for benefits and not their uptake is the crux of disabled persons’ trusts.

Philip Dunne: The Committee will be relieved to hear that I do not intend to detain it too long. Not for the first time, my hon. Friend the Member for Chipping Barnet—if I may say so without appearing too oily—spoke with considerable clarity and conviction on the issues, and with such comprehensiveness that we do not need to rehearse the subject for long. The amendments should not divide the Committee, because we are all committed to what they would do. The Government made the concession that there will be a carve-out for disabled people, but the issue is getting the definition of that carve-out right, so that we cover all the groups that are vulnerable and at risk.
I ask the Paymaster General to provide Opposition Members with some comfort about people with the three kinds of fluctuating disability: people with mental health problems, people with degenerative illnesses—both groups may be of sound mind when the trust is entered into; the examples of Alzheimer’s and HIV were given—and those who have an addiction, which is a condition that will fluctuate. The Marquess of Bristol, an example given by my hon. Friend the Member for Braintree (Mr. Newmark), might fall into that latter category, but one obviously needs to be careful about that. However, as charities have told us, there are plenty of examples of people who have an addictive problem for whom a trust provides a perfect mechanism for preventing them from damaging themselves financially during periods of unsoundness. I ask the Paymaster General to reassure Conservative Members that those issues will be properly addressed.

Dawn Primarolo: We could be forgiven for forgetting that we are talking about inheritance tax, and that the new rules apply to inheritance tax amounts of over the IHT threshold of £285,000. Many of the trusts spoken about will not be worth more than that amount, and are completely unaffected.

Theresa Villiers: Will the Paymaster General give way?

Dawn Primarolo: I should like to answer the questions. The hon. Member for Ludlow put direct questions to me, which I will answer, and I think that that will help the Committee.
On the definition, I shall not read into the record the names of the 41 organisations with which the Government consulted on the use of the measure. I acknowledge that some organisations take a slightly different view, but the consultation, which was extensive, included—and I name but a few—Contact a Family, the Council for Disabled Children, Disability Alliance, Mencap, the Thalidomide Trust, Barnardo’s, Scope, the disability rights commissioner, and the Family Fund. The issue was always what the appropriate read-across was. It is not feasible to suggest that we consult all over again, and consider changing tax law all over again, on the basis of the views of some organisations with a contrary view that are certainly not in the majority. Of course, the points are relevant for us when we watch the operation, but I do not believe for a moment that the organisations that I listed would have suggested the use of the Act that we are using if there was a better route, and they have considered all the routes.
I entirely accept Members’ deeply held views on the subject, but to suggest that the Government have somehow been cavalier in their approach is absolutely not true. Let us be clear: people have, in the past, used self-settlement trusts when facing the onset of long-running degenerative diseases. That is the first point that the hon. Member for Ludlow asked about. Government amendment No. 388 includes provision for trusts to be set up as disabled trusts that will get special, tax-favoured treatment. That matter has been dealt with.
The hon. Gentleman then asked for examples of other trusts. People set up other sub-settlement trusts for a range of reasons in order to protect themselves. One such example might be that of a wealthy drug addict who wants to prevent access to the addiction, although there will be other methods of doing so. Trusts are also used to prevent creditors gaining access to assets if someone goes bankrupt. Apparently, they are also used to avoid tax burdens in other countries, so if people want to use trusts, there will be many and varied reasons. However, we are talking about the special reasons for which we would give the special tax relief. The Government have made clear where they believe the justification lies.
The second point that the hon. Gentleman asked me to address was what he described as fluctuating conditions, in which somebody’s condition may be in remission, or however we would want to describe it. The condition from which the individual suffers is relevant at the time when the settlement is made, so if a person’s condition means that they periodically meet the qualifying criteria and they set up a trust at that point, they qualify. It is not withdrawn if a person—I cannot think of the appropriate language—is in remission or stabilises. That is where the Opposition amendments are mistaken, because we are dealing with the fact that for some individuals, the issue is about their ability to make decisions over financial matters. It is not about having a vehicle to protect themselves. The qualification is specific, so the point about fluctuation is dealt with.
The hon. Member for Chipping Barnet asked whether, for instance, manic depressives would qualify. We would go back to what is certified under the Mental Health Act 1983 to decide that point, and there are circumstances in which they would clearly qualify. That is a matter for the Act.
The definitions in the Bill were adopted from the trust modernisation consultation, and they cater for mental as well as physical incapacity. They are deliberately focused on cases in which a disabled person faces substantial difficulties with handling their affairs. The hon. Lady acknowledged that they are not intended as relief for a disability. A broader definition has not achieved consensus, and we cannot proceed on a basis whereby she quotes some organisations that disagree with the overwhelming majority of organisations that specialise in the area.
I have answered directly the points that the hon. Member for Ludlow asked, and I have covered why he has approached the matter in the way that he has. The provision is a fair and balanced response to the important points that have been put to the Government since the Bill was published. I commend the Government amendment to the Committee, and if Opposition Members were to choose to press their amendment, I would have to ask my hon. Friends to oppose it.

Theresa Villiers: I shall not press my amendment, although serious concerns must be addressed. It may be productive to come back to them on Report or in a further discussion of the different definitions. That will also give us more time to reflect on the Government’s amendments.
I welcome the Paymaster General’s clarification that if a trust is set up for those with fluctuating capacity during a period when the beneficiary qualifies as disabled, it will be a valid section 89 trust even if there is a period when capacity is regained at a later stage. That is useful clarification on the fluctuating capacity point, although there are still some issues to be resolved.
It is difficult to distinguish between this issue and self-settlement, which we will discuss shortly, because a range of vulnerable beneficiaries would be difficult to fit into a definition of disabled as it is generally understood, never mind one as narrow as that in section 89. The fact that there is not a general power to self-settle puts pressure on the definition of disability here. If everyone had the power to self-settle without incurring the new charges, a number of the problems in relation to the breadth of the definition of disability would go away.
I will not press my amendment. I welcome the Government’s moves in the right direction, although further moves need to be made before we have an adequate, comprehensive and rational method for dealing with trusts for disabled people.

Colin Breed: For the sake of absolute clarification—although I think that the Paymaster General answered my point—I had in mind someone in my constituency who is wheelchair-bound and has a degenerative illness but who is as sharp and as bright as a button and extremely mentally alert. I would not in any way suggest that he would be unable to look after his financial affairs, let alone be not very good at challenging all sorts of legislation with me. The test is that someone’s capacity to undertake their financial affairs comes before whether they have an attendance allowance or disability living allowance, which my constituent has. The fact that he is extremely able to manage his own affairs, notwithstanding that he is in receipt of an attendance allowance and disability living allowance, would bar him from being able to set up a disabled trust. Is that correct?

Dawn Primarolo: It is impossible for me to advise the hon. Gentleman on his constituency casework. With due respect to him, it depends on whether he has all the facts correct.
I have said clearly throughout our discussion that the arrangements relate to the Mental Health Act. There are good reasons for that and they have been made consistently and eloquently to the Government by those who represent and campaign for individuals. Without an indication of why the Government should move away from their approach, I am not prepared to consider doing so. I am standing by commitments that the Government made to that influential lobby. What is the point of having consultation if it is set aside shortly afterwards because a small group happens to disagree all the time with the overwhelming majority? That is the case that I clearly made today.
If the hon. Gentleman wants to write to me with more details about his constituent I will be happy to respond to him in writing if I can, but I am not prepared to comment on individual cases in the Committee. That would be entirely inappropriate.

Julia Goldsworthy: My hon. Friend the Member for South-East Cornwall (Mr. Breed) was merely seeking clarification of the remit of the proposals. The main issues of consistency and how to deal with fluctuating illnesses, which could be physical or mental, remain. We may return to those issues on Report, but, at this stage, I beg to ask leave to withdraw the amendment.

Amendment, agreed to.

Theresa Villiers: I beg to move amendment No. 270, in page 111, line 24 [Vol II], leave out ‘parent' and insert ‘relative'.

John Butterfill: With this it will be convenient to discuss amendment No. 271, in page 112, line 24[Vol II], at end insert—
‘(5A) In this section “relative” has the same meaning as in the Taxation of Chargeable Gains Act 1992 section 286 as if the reference to “lineal descendant” in that section were omitted.'.

Theresa Villiers: I have touched briefly on the amendments before because they are linked with Government amendment No. 384 which was grouped with the material on A and M trusts. AmendmentsNo. 270 and 271 would widen, to relatives, the scope of people who can set up bereaved minor trusts in their will. Amendment No. 271 adopts the definition of relative set out in the Taxation of Chargeable Gains Act 1992, with the exception of lineal descendants since there would seem to be no need to give children the right to set up trusts for their parents. It may even be a physical impossibility for them to set up a bereaved minor trust.
In amendment No. 384, the Paymaster General also seeks to widen the scope of people who can set up such trusts, but only to step-parents. There is no rational reason I have been able to understand as to why the scope of the people who can set up bereaved minor trusts has been restricted as it has been in the draft legislation. I welcome her move in the direction of widening it a little. However, many people who have contacted me feel that there is no good reason to prevent the grandparents and other relatives from providing for their grandchildren in a responsible and prudent way.
I can anticipate the Paymaster General’s response. She is going to refer to the examples that she gave as to why she is anxious about the use of A and M trusts generally. Returning to her example about wealth going down the generations, I return to the point that I made at the time that that is the consequence of the use of the potentially exempt transfer system. It could just have easily been done via outright transfers. It is not a trust problem.
If the Government are concerned about that, they need to address potentially exempt transfers, rather than penalise trusts and grandparents who wish to provide for their grandchildren. I would be interested to hear the Paymaster General’s reasoning as to what avoidance is targeted by restricting the scope of the ability to set up a bereaved minor trust to parents. If we broaden it to parents, what avoidance will there be? What is the rationale for the restriction on the scope of people who can set up those kinds of trusts? With that, I need not delay the Committee any further.

Philip Dunne: I support the amendment. It was regrettable that, when the Paymaster General gave the complex example in the first set of amendments that we discussed, in which she referred to trusts cascading from one grandparental relationship through to the next potential grandparental relationship, she did not remind the Committee that all trusts terminate after 80 years. That somewhat gives the lie to the suggestion that they could be used as a device to avoid inheritance tax in perpetuity. That could not apply. The amendment would broaden the identity of those who could set up trusts to lineal descendants and antecedents and, for that reason, I support it.

Dawn Primarolo: The hon. Member for Ludlow is wrong; in the example that I gave, money is transferred into another trust; trusts are created, and that is the point.
The hon. Member for Chipping Barnet spoke to Opposition amendments Nos. 270 and 271, which would change the idea that only parents were allowed to set up a trust for a bereaved minor. The amendments would extend the range to brothers, sisters, grandparents or any other living ancestor. I think that we have lost the plot here, in terms of what inheritance tax is about as a transfer between the generations, and under what circumstances it is exempt. Every single set of amendments that the hon. Lady has tried to advance would strengthen trusts so that they did not have to comply with the IHT rules. I come back to the point that I made right at the beginning: an outright gift has to be just that.
Of course, the Government believe that children whose parents have died are in an extremely difficult and vulnerable situation, and such children cannot properly look after assets that they have been left. They lack the parental guidance to decide what to do with the funds left to them, and there are some legal restrictions on what they can do, in a financial sense. Of course it is clear that there is a role for trusts in those situations, but it is a very particular situation that is being recognised. That was the case before the Budget, and that will continue to be the case in the treatment under schedule 20.
A trust set up for the benefit of a minor by a parent in case of that parent’s death—a so-called trust for a bereaved minor—is given tax-favoured treatment, but the Opposition amendments seek to expand the range of people beyond parents. The issue is not whether those other people can set up trusts for their relatives, but the interaction with the inheritance tax rules. The hon. Lady has advanced no clear justification why there should be an extension beyond the current exemptions. In fact, I would go further and suggest to her that to create such exemptions would be to leave the door open, enabling people to set up trusts to pass wealth on in a way that skips generations in families, in order to limit exposure to inheritance tax, and that is precisely what we are trying to deal with.

Theresa Villiers: If the Paymaster General has such objections to grandparents setting up trusts for their grandchildren, why does she propose allowing grandparents to set up life interest trusts for grandchildren in the case of the grandparents’ death? How is a bereaved minor trust different in quality to an interest in possession trust, and why does she find that so objectionable in the context of grandparents?

Dawn Primarolo: The hon. Lady does not understand the interaction of inheritance tax with the estate at that point. We are trying to deal with the very small number of cases in which that interaction does not occur, or where there is an attempt to ensure that it does not occur. I am not clear about the point behind the hon. Lady’s amendments. Is it about passing money to one’s grandchildren without passing it through one’s own children, and if so, why? Will she explain why that is important and the position in respect of inheritance tax? That would certainly be the effect and there is no justification for it.
Whether Opposition Members like it or not, they have to consider what inheritance tax rules say now about what should happen. The hon. Lady does not want to accept this from me, but I say again that the issue is not about sweeping changes in inheritance tax, whether spouse relief or anything else, but about dealing with a particular mechanism that the Government have identified as seeking to circumvent the rules. Surely that is a matter for all Members; those rules have been passed by this House and are supposed to apply to all citizens.

Julia Goldsworthy: Clearly, the amendments proposed by the hon. Member for Chipping Barnet and her colleagues extend by a long way the range of the proposals that we have discussed today.
Surely there is an issue. It is not only a parent or step-parent who might require the setting up of a trust for a minor in the event of their death; in some cases, a legal guardian might want to provide for a child, not their son or daughter but their ward, and protect them in the event of their death. Surely there is justification in wanting to ensure that such young people, who may already be in a very vulnerable situation, are protected.

Dawn Primarolo: The special treatment is restricted to parents because the trust is necessary to protect the child when they lose their parents. In other situations there can be alternatives to using trusts; normally, money is passed from generation to generation without a trust being involved. The trust is interposed on some occasions, and that is the point.
The case has not been made for why a very special exemption, necessary in such circumstances to protect the child, should be expanded to a longer list of people. That is not to say that grandparents will not want to make financial arrangements for their grandchildren, nor that parents will not want to plan for their children a long way in advance; the issue is about the interaction then with the inheritance tax rules. That is what we are dealing with here.

Stewart Hosie: If a child is brought up by a legal guardian as a ward of court and the guardian passes away, why should there be an inconsistency between the tax treatment of a trust for that child set up by the guardian, who would have brought the child up as a mother or father, and that of a trust set up by a natural mother or father in similar circumstances?

Dawn Primarolo: That is because the inheritance rules provide for that exemption specifically, and have always done so. It is now argued that the exemption should be widened; that may be a very interesting debating point, but the case has not been made. That is the point.
Why is it claimed by some that schedule 20 will stop grandparents and close family from setting up trusts? That is not the case. Trusts can be set up, whether to pay for school fees or anything else, but from now on such trusts will fall within the normal rules that operate for discretionary trusts. There will be tax to pay only if the amounts exceed the current IHT threshold of £285,000. If people do not want to take that route, the money can always be given to the parents to spend on the children, or by direct gift, so if the hon. Lady decides that she wishes to press the amendments I will urge my hon. Friends to reject them. The exemption is specific and special and should stay the way it is.

Theresa Villiers: I do not understand why the Paymaster General suggests that I want to expand some form of long-established category, when the long-established category is the A and M trust, which is currently open to anyone to set up. I am trying to return matters to a position whereby relatives are encouraged to provide for other relatives rather than being penalised by the tax system. There is an obvious situation in which such a trust could be enormously important—when the parents of a child have died and the grandparents want to make provision for that eventuality. I still fail to understand why the Paymaster General sees that particular situation as one of avoidance.

Rob Marris: The hon. Lady’s point has revealed to me what I thought might be the case: she is assuming what she is trying to prove, and her amendment does not do the half of what she thinks it does, because she has not undertaken the other half. She has assumed in her hypothetical scenarios that the grandparents will give money to an orphaned grandchild, but that is not what her amendment says. It would allow the grandparents to give money upon their deaths, as the deceased, to a minor whose parents were still living. That is the mismatch between her and the Paymaster General.

Theresa Villiers: The amendment would operate in relation to bereaved minor trusts, so a bereavement would have to have been suffered. The amendment would operate only in that situation and the grandparents would be able to set up the trust in that eventuality. I shall conclude there. The Government have sought to draw an arbitrary distinction between parents and other relatives, and it is a matter of concern that they should reconsider. However, given the majority in Committee I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendments made: No. 355, in page 112, line 10[Vol II], leave out from ‘of' to end of line 15 andinsert ‘—
(a) the trustees having the powers conferred by section 32 of the Trustee Act 1925 (powers of advancement),
(b) the trustees having those powers but free from, or subject to a less restrictive limitation than, the limitation imposed by proviso (a) of subsection (1) of that section,
(c) the trustees having the powers conferred by section 33 of the Trustee Act (Northern Ireland) 1958 (corresponding provision for Northern Ireland),
(d) the trustees having those powers but free from, or subject to a less restrictive limitation than, the limitation imposed by subsection (1)(a) of that section, or
(e) the trustees having powers to the like effect as the powers mentioned in any of paragraphs (a) to (d) above.'.
No. 356, in page 112 [Vol II], leave out lines 26 to 29 and insert
‘as if, in subsection (2) above, before “which” there were inserted “the purposes of”.'.
No. 357, in page 113, line 23 [Vol II], at end insert
‘, and
(d) as if, for the purposes of section 70(8) above as applied by this subsection, property—
(i) which is property to which section 71A above applies,
(ii) which, immediately before it became property to which section 71A applies, was property to which section 71D below applied, and
(iii) which, by the operation of section 71D(5)(a) below, ceased on that occasion (“the 71Dto71A occasion”) to be property to which section 71D below applied,
had become property to which section 71A above applies not on the 71Dto71A occasion but on the relevant earlier occasion.
(4) In subsection (3)(d) above—
(a) “the relevant earlier occasion” means the occasion (or last occasion) before the 71Dto71A occasion when the property became property to which section 71D below applied, but
(b) if the property, when it became property to which section 71D below applied, ceased at the same time to be property to which section 71 above applied without ceasing to be settled property, “the relevant earlier occasion” means the occasion (or last occasion) when the property became property to which section 71 above applied.'.—
No. 358, in page 113, line 27 [Vol II], at end insert—
‘71D Age 18-to-25 trusts
(1) This section applies to settled property (including property settled before 22nd March 2006), but subject to subsection (5) below, if—
(a) the property is held on trusts for the benefit of a person who has not yet attained the age of 25,
(b) at least one of the person's parents has died, and
(c) subsection (2) below applies to the trusts.
(2) This subsection applies to trusts—
(a) established under the will of a deceased parent of the person mentioned in subsection (1)(a) above, or
(b) established under the Criminal Injuries Compensation Scheme,
which secure that the conditions in subsection (6) below are met.
(3) Subsection (4) has effect where—
(a) at any time on or after 22nd March 2006 but before 6th April 2008, or on the coming into force of paragraph 3(1) of Schedule 20 to the Finance Act 2006, any property ceases to be property to which section 71 above applies without ceasing to be settled property, and
(b) immediately after the property ceases to be property to which section 71 above applies—
(i) it is held on trusts for the benefit of a person who has not yet attained the age of 25, and
(ii) the trusts secure that the conditions in subsection (6) below are met.
(4) From the time when the property ceases to be property to which section 71 above applies, but subject to subsection (5) below, this section applies to the property (if it would not apply to the property by virtue of subsection (1) above) for so long as—
(a) the property continues to be settled property held on trusts such as are mentioned in subsection (3)(b)(i) above, and
(b) the trusts continue to secure that the conditions in subsection (6) below are met.
(5) This section does not apply—
(a) to property to which section 71A above applies,
(b) to property to which section 71 above, or section 89 below, applies, or
(c) to settled property if a person is beneficially entitled to an interest in possession in the settled property and—
(i) the person became beneficially entitled to the interest in possession before 22nd March 2006, or
(ii) the interest in possession is an immediate post-death interest, or a transitional serial interest, and the person became beneficially entitled to it on or after 22nd March 2006.
(6) Those conditions are—
(a) that the person mentioned in subsection (1)(a) or (3)(b)(i) above (“B”), if he has not done so before attaining the age of 25, will on attaining that age become absolutely entitled to—
(i) the settled property,
(ii) any income arising from it, and
(iii) any income that has arisen from the property held on the trusts for his benefit and been accumulated before that time,
(b) that, for so long as B is living and under the age of 25, if any of the settled property is applied for the benefit of a beneficiary, it is applied for the benefit of B, and
(c) that, for so long as B is living and under the age of 25, either—
(i) B is entitled to all of the income (if there is any) arising from any of the settled property, or
(ii) no such income may be applied for the benefit of any other person.
(7) For the purposes of this section, trusts are not to be treated as failing to secure that the conditions in subsection (6) above are met by reason only of—
(a) the trustees having the powers conferred by section 32 of the Trustee Act 1925 (powers of advancement),
(b) the trustees having those powers but free from, or subject to a less restrictive limitation than, the limitation imposed by proviso (a) of subsection (1) of that section,
(c) the trustees having the powers conferred by section 33 of the Trustee Act (Northern Ireland) 1958 (corresponding provision for Northern Ireland),
(d) the trustees having those powers but free from, or subject to a less restrictive limitation than, the limitation imposed by subsection (1)(a) of that section, or
(e) the trustees having powers to the like effect as the powers mentioned in any of paragraphs (a) to (d) above.
(8) In this section “the Criminal Injuries Compensation Scheme” means—
(a) the schemes established by arrangements made under the Criminal Injuries Compensation Act 1995,
(b) arrangements made by the Secretary of State for compensation for criminal injuries in operation before the commencement of those schemes, and
(c) the scheme established under the Criminal Injuries Compensation (Northern Ireland) Order 2002.
(9) The preceding provisions of this section apply in relation to Scotland—
(a) as if, in subsection (2) above, before “which” there were inserted “the purposes of”, and
(b) as if, in subsections (3)(b)(ii) and (4)(b) above, before “trusts” there were inserted “purposes of the”.
71E Charge to tax on property to which section 71D applies
(1) Subject to subsections (2) to (4) below, there shall be a charge to tax under this section—
(a) where settled property ceases to be property to which section 71D above applies, or
(b) in a case where paragraph (a) above does not apply, where the trustees make a disposition as a result of which the value of the settled property to which section 71D above applies is less than it would be but for the disposition.
(2) Tax is not charged under this section where settled property ceases to be property to which section 71D above applies as a result of—
(a) B becoming, at or under the age of 18, absolutely entitled as mentioned in section 71D(6)(a) above,
(b) the death, under the age of 18, of B,
(c) becoming, at a time when B is living and under the age of 18, property to which section 71A above applies, or
(d) being paid or applied for the advancement or benefit of B—
(i) at a time when B is living and under the age of 18, or
(ii) on B's attaining the age of 18.
(3) Tax is not charged under this section in respect of—
(a) a payment of costs or expenses (so far as they are fairly attributable to property to which section 71D above applies), or
(b) a payment which is (or will be) income of any person for any of the purposes of income tax or would for any of those purposes be income of a person not resident in the United Kingdom if he were so resident,
or in respect of a liability to make such a payment.
(4) Tax is not charged under this section by virtue of subsection (1)(b) above if the disposition is such that, were the trustees beneficially entitled to the settled property, section 10 or section 16 above would prevent the disposition from being a transfer of value.
(5) For the purposes of this section the trustees shall be treated as making a disposition if they omit to exercise a right (unless it is shown that the omission was not deliberate) and the disposition shall be treated as made at the time or latest time when they could have exercised the right.
71F Calculation of tax charged under section 71E in certain cases
(1) Where—
(a) tax is charged under section 71E above by reason of the happening of an event within subsection (2) below, and
(b) that event happens after B has attained the age of 18,
the tax is calculated in accordance with this section.
(2) Those events are—
(a) B becoming absolutely entitled as mentioned in section 71D(6)(a) above,
(b) the death of B, and
(c) property being paid or applied for the advancement or benefit of B.
(3) The amount of the tax is given by—
(4) For the purposes of subsection (3) above, the “Chargeable amount” is—
(a) the amount by which the value of property which is comprised in the settlement and to which section 71D above applies is less immediately after the event giving rise to the charge than it would be but for the event, or
(b) where the tax is payable out of settled property to which section 71D above applies immediately after the event, the amount which, after deducting the tax, is equal to the amount on which tax would be charged by virtue of paragraph (a) above.
(5) For the purposes of subsection (3) above, the “Relevant fraction” is three tenths multiplied by so many fortieths as there are complete successive quarters in the period—
(a) beginning with the day on which B attained the age of 18 or, if later, the day on which the property became property to which section 71D above applies, and
(b) ending with the day before the occasion of the charge.
(6) Where the whole or part of the Chargeable amount is attributable to property that was excluded property at any time during the period mentioned in subsection (5) above then, in determining the “Relevant fraction” in relation to that amount or part, no quarter throughout which that property was excluded property shall be counted.
(7) For the purposes of subsection (3) above, the “Settlement rate” is the effective rate (that is to say, the rate found by expressing the tax chargeable as a percentage of the amount on which it is charged) at which tax would be charged on the value transferred by a chargeable transfer of the description specified in subsection (8) below.
(8) The chargeable transfer postulated in subsection (7) above is one—
(a) the value transferred by which is equal to an amount determined in accordance with subsection (9) below,
(b) which is made at the time of the charge to tax under section 71E above by a transferor who has in the period of seven years ending with the day of the occasion of the charge made chargeable transfers having an aggregate value equal to that of any chargeable transfers made by the settlor in the period of seven years ending with the day on which the settlement commenced, disregarding transfers made on that day, and
(c) on which tax is charged in accordance with section 7(2) above.
(9) The amount referred to in subsection (8)(a) above is equal to the aggregate of—
(a) the value, immediately after the settlement commenced, of the property then comprised in it,
(b) the value immediately after a related settlement commenced, of the property then comprised in it, and
(c) the value, immediately after it became comprised in the settlement, of any property which became so comprised after the settlement commenced and before the occasion of the charge under section 71E above (whether or not it has remained so comprised).
71G Calculation of tax charged under section 71E in all other cases
(1) Where—
(a) tax is charged under section 71E above, and
(b) the tax does not fall to be calculated in accordance with section 71F above,
the tax is calculated in accordance with this section.
(2) The amount on which the tax is charged is—
(a) the amount by which the value of property which is comprised in the settlement and to which section 71D above applies is less immediately after the event giving rise to the charge than it would be but for the event, or
(b) where the tax is payable out of settled property to which section 71D above applies immediately after the event, the amount which, after deducting the tax, is equal to the amount on which tax would be charged by virtue of paragraph (a) above.
(3) The rate at which the tax is charged is the rate that would be given by subsections (6) to (8) of section 70 above—
(a) if the reference to section 70 above in subsection (8)(a) of that section were a reference to section 71D above,
(b) if the other references in those subsections to section 70 above were references to section 71E above, and
(c) if, for the purposes of section 70(8) above, property—
(i) which is property to which section 71D above applies,
(ii) which, immediately before it became property to which section 71D above applies, was property to which section 71 applied, and
(iii) which ceased on that occasion to be property to which section 71 above applied without ceasing to be settled property,
had become property to which section 71D above applies not on that occasion but on the occasion (or last occasion) before then when it became property to which section 71 above applied.”.'.
No. 384, in schedule 20, page 113, line 27 [Vol II], at end insert—
‘71H Sections 71A to 71G: meaning of “parent”
In sections 71A to 71G above “parent” includes step-parent.”.'.—[Dawn Primarolo.]

Amendment proposed: No. 291, in page 114 [Vol II], leave out lines 9 to 23.—[Mrs. Villiers.]

Question put, That the amendment be made:—

The Committee divided: Ayes 9, Noes 20.

Question accordingly negatived.
Further consideration adjourned.—[Mr. Heppell.]

Adjourned accordingly at four minutes to Eight o’clock till Thursday 15 June at five minutes past Nine o’clock.